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June 2011 The International Trade Department

Version 1.0

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Contents

ACKNOWLEDGEMENTS ......................................................................................................................... iii

INTRODUCTION TO THE TOOLKIT ............................................................................................. iv

PART 1: OVERVIEW AND GUIDELINES FOR CONDUCTING A TRADE COMPETITIVENESS DIAGNOSTIC .............................................................................................................................. 1

Chapter 1: Understanding trade competitiveness: issues and current debates ............................................ 2

Chapter 2: The TCD Framework ..................................................................................................................... 7

Chapter 3: Organizing to conduct a TCD ........................................................................................................ 9

Chapter 4: Stage 1 – Conducting the Trade Outcomes Analysis .................................................................. 12

Chapter 5: Stage 2 – Conducting the Competitiveness Diagnostics ............................................................. 23

Chapter 6: Stage 3 – Moving from Analysis to Policy Options ..................................................................... 33

PART 2: IMPLEMENTATION TOOLKIT ...................................................................................... 34

Introduction to the Implementation Toolkit ................................................................................................ 35

Part 2A: Trade Outcomes Analysis ....................................................................................................... 36

Growth and Share – the intensive margin .................................................................................................... 37

Diversification – the extensive margin ......................................................................................................... 56

Quality and sophistication – the quality margin .......................................................................................... 62

Entry and survival – the sustainability margin.............................................................................................. 76

Part 2B: Competitiveness Diagnostics ................................................................................................. 84

Market Access ............................................................................................................................................... 85

Incentive Framework: Trade and Investment Policy .................................................................................. 102

Incentive Framework: Domestic Policies and Institutions (Competition, Business Environment and Governance) ............................................................................................................................................... 120

Factor Conditions: Access to Finance ......................................................................................................... 132

Factor Conditions: Labor Markets, Skills, and Technical Efficiency ............................................................ 136

Factor Conditions: Intermediate Inputs and Backbone Services................................................................ 143

Factor Conditions: Trade Facilitation and Logistics .................................................................................... 150

Trade Promotion Infrastructure: Export and Investment Promotion ........................................................ 163

Trade promotion infrastructure: Standards and Certification ................................................................... 170

Trade Promotion Infrastructure: Special Customs Regimes and SEZs ....................................................... 194

Trade Promotion Infrastructure: Industry Coordination and Sector support ............................................ 201

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Trade Promotion Infrastructure: Innovation .............................................................................................. 206

Part 2C: Policy Options for Competitiveness and Case Studies .......................................................... 222

Market Access ............................................................................................................................................. 223

Trade and Investment Policy ...................................................................................................................... 225

Domestic Policies and Institutions: business environment and governance ............................................. 227

Access to Finance ........................................................................................................................................ 230

Labor Markets, Skills and Technical Efficiency ........................................................................................... 233

Intermediate Inputs and Backbone Services .............................................................................................. 236

Trade Facilitation and Logistics .................................................................................................................. 238

Export and Investment Promotion ............................................................................................................. 242

Standards and Certification ........................................................................................................................ 244

Special Customs Regimes and SEZs ............................................................................................................ 247

Industry Coordination and Sector Support ................................................................................................. 248

Innovation ................................................................................................................................................... 250

APPENDIX .............................................................................................................................. 252

References .................................................................................................................................................. 253

Acronyms .................................................................................................................................................... 267

Product Classifications ................................................................................................................................ 270

Summary of recent papers on determinants of trade competitiveness .................................................... 272

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ACKNOWLEDGEMENTS The Trade Competitiveness Diagnostic Toolkit was prepared by Jose Guilherme Reis (TTL) and Thomas Farole in the International Trade Department of the World Bank (PRMTR), along with a team including Swarnim Waglé (Trade Outcomes and Market Access), Jose Daniel Reyes (Trade Outcomes), Mariem Malouche (Trade and Investment Policy), Michael Friis Jensen (Standards), and Juan Julio Gutierrez (Innovation). In addition, the section on Trade Facilitation and Logistics is based heavily on PRMTR’s TTFA Toolkit, for which the team acknowledges the contribution Jean Francois Arvis, Alina Mustra, and Charles Kunaka. The team would also like to thank others who contributed their input and expertise in the development of this Toolkit, including Cornelia Staritz, Daria Taglioni, Guillermo Arenas, Murat Seker, Ana Paula Cusolito, Martha Denisse Pierola, Ana Margarida Fernandes, Gladys Lopez‐Acevedo, Olivier Cadot, Gerard McLinden, Toni Matsudaira, Daniel Lederman, Leyla Castillo, and Raphael Kaplinsky. Thanks also to the peer reviewers and advisors for their valuable input, including Paulo Correa, David Rosenblatt, Vincent Palmade, Najy Benhassane, Jose Luis Guasch, and especially Eric Manes, who was not only a peer reviewer but a supporter of the Toolkit by leading the first pilot Diagnostic. Thanks also to the other TTLs who supported the piloting of the Diagnostic, including Julia Devlin, Aurora Ferrari, Paulo Correa, Sjamsu Rahardja, and Alain d’Hoore. Finally, thanks to the many others (in addition to those above) that provided comments and input during the concept and final review meetings as well as throughout the development process, including: Kazi Al‐Matin, Paul Brenton, Ian Gillson, Sebastian Saez, Ravindra Yatawatra, Barbara Rippel, Harun Onder, and participants of various seminars including at the World Bank (LAC and SAR regions), and at the OECD. This Toolkit was prepared under the direction of Mona Haddad (Sector Manager) and Bernard Hoekman (Director) of the International Trade Department.

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INTRODUCTION TO THE TOOLKIT This Trade Competitiveness Diagnostics (TCD) Toolkit provides a framework, guidelines and practical tools

for conducting an analysis of trade competitiveness. This Toolkit is relevant for assessing the

competitiveness of a country’s overall basket of exports as well as specific traded sectors, in terms of

growth, orientation, diversification, quality, and survival. It includes guidance on a range of tools and

indicators that can be used to analyze trade performance as well as quantitative and qualitative approaches

to analyzing the market and supply side factors that determine trade performance. Ultimately it aims to

facilitate the identification of the main constraints to improved trade competitiveness and the policy

responses to overcome these constraints.

The output of a TCD exercise could be a stand‐alone product (ESW) or could contribute to existing Bank

products – for example, it could form a substantial part of a DTIS, a chapter within a CEM, or could form the

basis for programs within a Competitiveness DPL. Overall, the TCD is designed to be used in a modular way

– full country Diagnostics can be undertaken or various tools of the Diagnostic can be used to address

specific questions of interest to the country team. The output from a TCD will identify issues to be

addressed in more detail by specialized Bank staff, client country policymakers and other stakeholders, and

development partners. In some cases it may identify issues that require a further level of analysis using

existing Bank products. In other cases, it will lead to engagement between client countries and specific

experts from within the Bank.

The World Bank and the trade and competitiveness agenda

The World Bank and other multilateral organizations have played an important role over the years in promoting trade through support for the adoption of liberal trade and investment policies. In recent years, the agenda to support trade growth has moved beyond trade policy and market access to embrace “behind the border” issues. Indeed, competitiveness lies at the core of the Bank’s new Trade Strategy. At the operational level, country teams are increasingly requesting analytical support to understand the factors impacting competitiveness in current traded sectors, along with the prospects for diversification. This has been reflected in the growing emphasis on trade and competitiveness in the Bank’s lending and technical assistance portfolio. Two‐thirds of Country Assistance Strategies now recognize trade and competitiveness as a priority and trade‐related lending has grown significantly (World Bank, 2009). As of September 2009, more than 250 active AAA projects and 195 active lending products listed competitiveness as a priority. Within Bank operations, a large and active export competitiveness network has facilitated knowledge‐sharing on throughout the Bank and with clients and development partners since 2007. While the Bank is in a good position to deploy expertise across most the issues related to trade competitiveness, there remains a need to: a) be able to analyze competitiveness ex ante in order to respond in a systematic fashion; and b) to identify the most important constraints to competitiveness, in order to be able to prioritize policy responses. This difficulty is related to the broad‐based, often “fuzzy” nature of the concept of competitiveness. The Trade Competitiveness Diagnostic is designed to help address this challenge.

The TCD Toolkit is intended both for policymakers and practitioners involved in analyzing trade

performance and designing trade and industrial policy. Although the primary audience is World Bank

country and regional staff, including from PREM, FPD and other networks, it is also designed for use by

donors and development agencies, government ministries and agencies, and academic and policy

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institutions. Given the diverse objectives and interests of this target group, users are encouraged to make

selective use of the Toolkit based on their interests, contexts, and capacities.

To make this Toolkit useful to different audience needs, it is split into two main sections:

Part 1: Overview and Guidelines for Conducting a Trade Competitiveness Diagnostic – summarizes

the main issues and offers a step‐by‐step guideline for conducting a diagnostic of trade

competitiveness. This is appropriate for all audiences, including policymakers and managers

overseeing a Diagnostic exercise.

Part 2: Implementation Toolkit – provides detailed practical information and tools for actually

carrying out the diagnostic. This is appropriate for practitioners conducting the analysis and for task

team leaders organizing and managing the exercise. Part 2 is divided further into three sections:

o 2A: Trade Outcomes Analysis – Indicators and Tools

o 2B: Competitiveness Diagnostics – Analytical frameworks, Indicators and Interview Guides

o 2C: Policy Options for Competitiveness and Case Studies

In addition, the Toolkit includes an Appendix covering the following:

o References to works cited in the Toolkit

o A table of acronyms and their meaning

o A description of 2‐digit product classifications for HS and SITC

o A summary of some recent papers on trade competitiveness that contributed to the preparation of the TCD Toolkit

What this version of the Toolkit is not designed to do:

Pick “winning” sectors or products: While a combination of the analytical tools available in the Trade Outcomes Analysis could be used to identify sectors or products for the purposes of industrial policy intervention, the existing Toolkit is designed for diagnostics rather than for opportunity identification per se. Thus, no step‐by‐step guide is provided for the process of product‐level analysis and prioritization.

Sector‐specific diagnostics: This version of the Toolkit is designed primarily for analyzing a country’s overall export basket, with the potential of conducting sector‐level analysis as a “lens” through which to view competitiveness of the overall trade sector. While it is possible to conduct a sector‐specific diagnostic using the framework in this Toolkit, a “version 2.0” of the Toolkit will develop a series of tailored modules for analyzing specific sectors. In this version, we provide some broad guidelines on the types of issues that may be more or less important for specific sectors (light manufacturing, agri‐business, tourism, and business services).

Detailed policy prescriptions: This version of the Toolkit includes discussion of broad policy areas and options for consideration in addressing the specific constraints identified through the Diagnostic exercise. It also includes case studies of “good practice” showing policies that were effective in addressing specific trade competitiveness constraints across a wide range of countries. However, given the highly context‐specific and endogenous nature of policy development (particularly in area of competitiveness), and the critical importance of taking into account political economy considerations, the Toolkit does not provide prescriptive advice on the specific policies that should be adopted.

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PART 1: OVERVIEW AND GUIDELINES FOR CONDUCTING A TRADE

COMPETITIVENESS DIAGNOSTIC

PART 1: OVERVIEW AND GUIDELINES FOR CONDUCTING A TRADE COMPETITIVENESS DIAGNOSTIC

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Chapter 1: Understanding trade competitiveness: issues and current debates

Trade, growth, and convergence

Since most developing countries abandoned wholesale import substitution models in the 1980s in favor of

export‐led growth, the pace of global trade integration has been nothing short of extraordinary. Indeed,

trade has arguably been the most important driver of global growth, convergence, and poverty alleviation

over the last quarter century. Developing countries in particular have benefited—annual exports from low‐

and middle‐income countries grew 14 percent annually since 1990 compared to only 8 percent from high‐

income countries. Despite the recent global economic crisis there remains a consensus on the positive

relationship between trade and long‐run economic growth. This relationship runs in both directions: the

richer countries become the more they tend to trade; but also, and more importantly, countries that

engage in more trade grow richer more quickly. The East Asian experience of export‐led growth over the

past three decades provides powerful evidence of the role of trade in facilitating growth. However, regions

still vary widely in the degree to which they are integrated into global markets1. Within regions, the

variance is even more dramatic – for example, Vietnam’s trade is 158% of its GDP, Thailand’s 136% and

Cambodia’s 113%, while neighboring Laos has a trade share of only 47% of GDP.

Figure 1.1: Evolution of trade share of GDP (1970‐2008) and Trade share of GDP by region (2008)

Source: World Development Indicators

The economic benefits of exporting have a long‐established theoretical basis. Specifically these include

static efficiency gains derived from exploiting comparative advantage and improved allocation of scarce

resources, as well as dynamic gains in the more productive export sector engineered by higher competition,

greater economies of scale, better capacity utilization, the dissemination of knowledge, and technological

progress. The recent literature on heterogeneous firms also emphasizes that exporters on average are

more productive, capital‐intensive, larger, and pay higher wages than non‐exporters (c.f. Bernard et al,

2007). For developing countries, exports are also a main source of hard currency necessary to finance the

import of capital goods and other inputs. Indeed, the gains to trade are as much derived from imports as

1 Of course, trade share is affected significantly by factors unrelated to competitiveness, including natural endowments and, most importantly, country size and geographical location. This explains, for example, the large gap in traded shares of Germany’s economy versus that of the US.

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1970

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Low & middle income High income

64%68%

58%

42%

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40%

0%

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AFR EAP ECA LAC MENA SAR

world avg.


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from exports – openness to imports also acts as a disciplining force on domestic markets, leading to lower

cost, higher quality inputs for producers.

The “competitiveness” approach

What are the constraints that prevent countries from exploiting trade potential for long‐term economic

gain? Traditionally, the focus has been on reducing barriers to market access – through trade policy

measures such as reducing tariffs and quotas, granting preferences, and broader liberalization efforts. But

even with the benefit of preferential market access, many developing country exporters are unable to

compete in global markets. The barriers they face are many and diverse, including: macroeconomic policies

which distort efficient market entry and competition; poor factor conditions (cost and skill of labor, cost of

capital), poor infrastructure and backbone services, and transport and logistics inefficiencies that raise

production and trade costs; and information and coordination failures and underprovision of public goods,

which prevent the exploitation of intra‐ and inter‐industry. The realization of this gap has contributed to the

emergence of the ”behind the border” agenda in recent years.

Thus, the “competitiveness” approach seeks to address the microeconomic environment which shapes

individual firms’ capacities and incentives on a daily basis. This competitiveness policy framework can be

structured in three pillars, as illustrated in Figure 1.2.

Figure 1.2: The three pillars of trade competitiveness

Trade competitiveness: issues and current debates

For most countries, particularly middle and high income economies, the large majority of export growth

takes place at the intensive margin – i.e. by selling more of the same products to the same markets

(Brenton & Newfarmer, 2009). This deepening of trade relationships is supported by increasing

specialization, which may be across products or within products. Within‐product specialization can be

observed through levels of intra‐industry trade, which may derive from specialization in stages of

Aligning macro incentives

• Removing economic biases arising from tariff and non‐tariff barriers, real exchange rate misalignment, and distortive tax regime; ensuring overall fiscal health of the economy, efficient labor market operation, product and factor market conditions, property rights protection, effective regulation, and ease of firm entry and exit

Improving backbone services and reducing transactions costs

• Improving backbone services and inputs such as energy, telecommunications, finance, and other services inputs; improving capacity and coordination of government agencies at the border, international transit arrangements, regional and multilateral agreements, and policy reforms that ensure more competitive markets for international transport, logistics, and other services that facilitate trade transactions

Proactive policies for overcoming

government and market failures

• Promoting technology creation and adaptation, streamlining product standards and certifications, providing trade finance, supporting industry clusters, facilitating special economic zones and other spatial developments, and ensuring coordination of economic actors and linkages and spillovers to the local economy


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production as well as from specialization at different levels of the quality ladder (what we call in the TCD,

the “quality margin”). The former is the source of the trade in components – or intermediate inputs – that

characterize global production networks. The latter is the source of “cross‐hauling”, or the two‐way trade in

similar end products that allows for the intense two‐way trade within high income countries in areas like

automobiles (e.g. Fiats to Germany and BMWs to Italy), clothing (e.g. Zara to Sweden and H&M to Spain),

and commonplace food items like yoghurt, juice, and ice cream. For developing countries, however, growth

at the extensive margin – including both new product “discovery” and selling existing products to new

markets – remains a critical to driving exports and employment. Indeed, the reduced vulnerability to

external shocks that results from a diversification of exports is critical to long‐run growth. However, for new

trade flows to be sustainable and deliver broad‐based growth, it is important that a large cross‐section of

firms are able to take advantage of trade opportunities, and that they are able to overcome the many

constraints that threaten the export survival of firms in their initial years.

Box 1.1 summarizes some of the key ongoing issues and debates in research and policy in relation to trade

competitiveness.

Box 1.1: Key issues and debates

Trade openness: The recent global economic crisis led to a re‐emergence of the debate over the benefits of openness. Analysis of the crisis suggests that more open economies tended to see their trade and GDP levels fall more rapidly than economies who were less integrated in global markets (Eichengreen, 2011). On the other hand, the countries and regions (e.g. East Asia) that were most integrated into the global economy have also seen their economies bounce back more quickly. And, despite the concerns that the crisis would lead to a return to protectionism, there is little evidence that this has been the case. Indeed, most policymakers appear to be convinced of the benefits of openness, while also aware of the risks it brings and the need to adopt policies that can minimize these risks (for a detailed discussion of these issues see Haddad and Shepherd [2011]).

Services trade: Trade in services, particularly business services, has become a dynamic component of trade as well as another source of export diversification in developing countries. During 2000‐2007, trade in services grew as fast as trade in goods, at an average rate of 12 percent per year. India’s success is well known: exports of software and business process services account for approximately 33 percent of India’s total exports. Brazil, Costa Rica, and Uruguay export professional and information technology related services; Mexico exports communication and distribution services; Chile exports distribution and transportation services. African countries are also participating. Morocco, Tunisia, Kenya and South Africa provide professional services to Europe, and Egypt has developed a world class call center sector. Health services are successfully exported by the Philippines and Thailand.

South‐South trade: Trade among developing countries tripled between 1996 and 2006, and now accounts for more than 12% of all world trade. More than 45% of imports in developing countries was supplied by other developing countries in 2008. This trend is driven by the rapid growth in economies like China and India, which is driving trade in both commodities and processed goods. Reductions in the average level and the dispersion of tariffs have been a significant force behind South‐South trade. The average tariffs imposed by the BRICs decreased 44 percent during 1996‐2008. Tariffs in lower middle‐income countries declined by 31% during the same period.

Diversification or reconcentration? Imbs and Wacziarg (2003) uncovered an unexpected non‐monotonic relationship between production diversification and GDP per capita. Past a certain level of income (US$9,000 in 1985 PPP dollars), countries appear to re‐concentrate their production structure. Klinger and Lederman (2006) as well as Cadot et al. (2011) analyze the issue from a trade perspective and find the same U‐shaped pattern, but at higher levels of GDP per capita (over US$22,000 in 2005


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PPP dollars).

The productivity and diversification nexus: While the link between trade and productivity has been long recognized, the direction of its causality has been less clear. The new trade models based on firm heterogeneity (c.f. Bernard and Jensen, 1999; Melitz, 2003; Helplman, Melitz, and Yeaple, 2004) have made important progress in showing how productivity, at the firm level, contributes to export participation. At the same time, this new literature shows that at an aggregate level, export participation contributes to economywide productivity increases.

A natural resource curse?: The traditional view (c.f. Sachs and Warner, 1997) of natural resources (and commodities) as being a “curse”, constraining the long‐term growth of developing countries has been challenged both by new emprical research and changes in global commodities markets. Evidence suggests it is not natural resources dependence per se that increase risk, but rather the concentration of exports (Lederman and Maloney, 2007). Indeed, with the demand for commodities rising and likely to be sustained over the medium term, diversification into agriculture and commodities is rising on the agenda of low‐income countries.

Sophistication or quality? One key debate is whether export competitiveness is best achieved through an evolutionary process of upgrading – selling lower quality goods to regional markets and building capabilities before moving into more competitive, sophisticated global markets – or leapfrogging immediately to sophisticated goods and / or rich country markets. Rodrik (2006) and Hausman, Hwang, and Rodrik (2007) argue that certain goods provide greater opportunities for growth because of greater potential to upgrade vertically within the industry (e.g. cars versus bananas) and to benefit from inter‐industry spillovers of knowledge. Coming at it from a different angle, Mattoo and Subraimanian (2009) find that, contrary to conventional wisdom, many of the recent successful emerging economies have grown not only by following comparative advantage but also using industrial policies to defy it. Others question the premise of “sophistication” – that selling “rich country” products is more likely to make you rich – arguing that quality is not engrained in the product but rather the process (Xu, 2010; Lederman and Maloney, 2009; Harrison & Rodríguez‐Clare, 2009; Schott, 2004).

Export discovery or export survival?: Research by Hausmann and Rodrik (2003) and Klinger and Lederman (2004) argue that firms in developing economies tend to underinvest in export “discovery”, fearing that the erosion of their margin by market followers who would not face the same level of sunk costs of investment borne by first movers. On the other hand, recent research on survival (Brenton, Pierola, and von Uexkull, 2009; Cadot et al, 2010) documents extensive experimentation in low income countries and argues that the problem is that these export relationships are short‐lived; indeed, in a study of African exporters, Cadot et al (2010) find that less than 20% of export relationships survive the first year. While the former set of findings suggests policies (e.g. subsidies, export promotion) to support the discovery process, the latter indicate the need for greater focus on addressing the constraints to sustaining export flows.

Export agglomeration and spillovers: The recent research on export survival suggests there is an element of “learning by doing” to exporting – experience with exporting the same product to other markets or different products to the same market are found to strongly increase the chance of export survival. Perhaps more interestingly, export survival appears to be affected by spillovers. For example, Cadot et al (2010) find that the chances of a firm’s exports surviving increase with the number of other firms also exporting a specific product to a specific market (and this effect is stronger for heterogeneous goods that for homogenous ones). These findings suggest the potential importance of knowledge spillovers across exporters, and point to the potentially valuable role of export promotion agencies to facilitate information exchange and collective action.

Ultimately, the aim of trade for policymakers is sustainable, broad‐based economic growth, and so an

important question that remains is how a country translates trade into growth and poverty reduction. Not


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all sectors are equally predisposed to contribute to spillovers and broad‐based economic growth.

Finally, it is important to recognize that what matters for competitiveness is not only the capability to be

productive in a static or slowly evolving external environment, but also the ability to adjust and adapt to

structural changes. Being able to remain competitive and to adapt to changes requires redeploying

resources (capital, labor, institutions) to higher value activities. Policies that promote entry and exit in both

product and factors markets are also important, as inefficient factor and product markets, as well as high

costs of entry and exit may lead firms to incur otherwise unnecessary adjustment costs whenever a shock

hits an economy.2

The multifaceted nature of trade competitiveness thus requires a deep understanding of the wide range of

factors which may contribute or constrain it. And as these factors are often highly endogenous, a piecemeal

approach to reform is unlikely to be effective. At the very least, a comprehensive approach to

understanding the constraints and how they impact on the trade sector is necessary.

2 See, among others, Caballero, Engel and Micco (2004) and Caballero, Cowan, Engel and Micco (2004) for a discussion of the role of microeconomic flexibility on productivity growth in Latin America and in Chile in the end of the 1990s.


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Chapter 2: The TCD Framework Figure 2.1 presents the overall TCD framework, linking explanatory factors to observed trade performance

– it has two main components: Trade Outcomes Analysis and Competitiveness Diagnostics.

Figure 2.1: TCD Framework

The Trade Outcomes Analysis provides a quantitative and qualitative assessment of historical trade

performance using the decomposition of the margins of trade growth as our framework for exploring trade

competitiveness. Specifically we define four principal factors on which a country’s trade competitiveness

performance can be determined: 1.) the level, growth, and market share performance of existing exports

(the “intensive margin”) of exports as well as market share performance; 2.) diversification of products and

markets (the “extensive margin”); 3.) the quality and sophistication of exports (the “quality margin”); and

4.) the entry and survival of new exporters (the “sustainability margin”)

Understanding a country’s relative performance (overall or at a sector level) on these various aspects of

trade provides a summary of its competitiveness in global markets. But this is only half the story. In order to

have a chance to improve competitiveness, it is necessary also to understand the main determinants of

competitiveness, the factors which are most constraining, and the policy levers that might be pulled to

overcome these constraints. This is no simple task, given the broad‐based nature of competitiveness3. The

second component of the TCD – Competitiveness Diagnostics – provides a framework for analyzing

determinants of trade competitiveness across three broad areas:

3 For example, the World Economic Forum’s Global Competitiveness Index (World Economic Forum, 2008) covers 12 “pillars” of competitiveness, ranging from micro‐level business sophistication to such broad factors as macroeconomic stability and health and primary education. While these issues no doubt all play a role in determining economy‐wide and firm‐level competitiveness over the long run, in the case of the TCD, we focus on the issues that impact the trade sector directly, and in the short‐to‐medium term.

TRADE OUTCOMES ANALYSIS

Growth and share(Intensive margin)

Diversification(Extensive margin)

Quality & sophistication (Quality margin)

Entry & survival (Sustainability margin)

COMPETITIVENESS DIAGNOSTICS

Market access

channels

Factor and transaction costs Technology and efficiencyEntry costs

Supply side factors Trade promotion infrastructure

Macro‐incentive framework

Factor conditions


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1. Market access focuses on the external trade policy environment that may facilitate or constrain

exporters from entering and maintaining competitiveness in markets.

2. Supply‐side factors covers a broad range of determinants including governance and macro‐

fiscal, trade, and domestic policies that establish the incentive framework faced by the private

sector; as well as the factor inputs that determine competitiveness at the factory or farm gate. .

3. Trade promotion infrastructure covers the range of interventions by government to address

market failures (coordination challenges, asymmetric information) and government failures

that restrict export participation and performance, including traditional export promotion,

SEZs, industry coordination bodies, and standards regimes.

Each of these components shapes observed trade performance through its impact on individual firms in

one (or more) of three channels: the fixed costs (and risk) of production and export entry, the factor and

transactions costs that determine factory‐gate competitiveness, and the level of technology and efficiency

at which the sectors and firms operate. In an efficient a competitive context, capital will be allocated to the

most productive firms in those sectors who will invest in the most productive sectors. But where the policy

environment protects certain sectors or firms, it may create an anti‐export bias and/or a gap between

where capital can appropriate the greatest rents and where it is most efficient from an economy‐wide

perspective. Equally, where structural competitiveness gaps exist, firms may under invest in sectors that

should otherwise be a source of comparative advantage.

In practice, the two components – Trade Outcomes Analysis and Competitiveness Diagnostics – are usually

conducted separately and sequentially. First, the Trade Outcomes Analysis gives a picture of trade

performance, identifies key areas of weakness or risk in trade competitiveness, and raises questions and

hypotheses about the contributing factors. This helps set the agenda for the Competitiveness Diagnostics

which follows, and focuses on understanding the underlying policies and structural dynamics that shape

this observed performance.


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Chapter 3: Organizing to conduct a TCD

Establishing the objectives

The starting point for undertaking a Trade Competitiveness Diagnostic is to define the objectives of the

assessment. Objectives will vary from one country to the next, depending on its challenges, its trade and

industrial strategy, and the planning and policy processes into which the assessment will contribute. Before

undertaking the assessment, at minimum, the issues outlined in Table 3.1 should be considered.

Table 3.1: Considerations in establishing objectives of the TCD

Objectives of export strategy

How important has the export sector been and what are the perceptions of recent / future performance?

Is there an emphasis on diversification? Upgrading?

How the results will be used?

Feeding into a national export, trade, or industrial strategy

To inform policy dialogue on opportunities to improve trade performance and remove constraints to export sector

To identify specific projects or programs as part of a wider initiative designed to improve competitiveness

Scope of the assessment

National v sectoral

Is there a need to understand the structure and performance of the overall export portfolio – e.g. in order to assess the economies process of adjustment?

Are the specific sectors – economically critical or potential future opportunities – on which the assessment will focus?

Broad v focused

Will the assessment take a comprehensive approach to diagnose “binding constraints” to competitiveness or are there specific issues (e.g. trade promotion, trade logistics, etc.) that will be the main focus?

Because the TCD has been designed in a modular way, the potential scope and output may vary

considerably from project to project. Full country or sector‐level diagnostics can be undertaken or various

tools of the TCD can be used to address specific questions of interest. Box 3.1 describes one way to use the

Diagnostic to develop a series of policy notes on trade competitiveness.

Box 3.1: Using Trade Competitiveness Diagnostics to develop policy notes

The Trade Competitiveness Diagnostic can provide a useful set of tools with which to engage governments on a broad discussion of competitiveness. One way to organize the Diagnostic to facilitate such a dialogue is to plan for the preparation of a series of policy notes derived from the analysis. The first stage of the TCD – the Trade Outcomes Analysis – provides a detailed quantitative assessment of trade performance across several measures of competitiveness. Not only can this analysis be packaged as a useful note in its own right, but it can also be used to identify specific sector‐level analysis or questions, that can guide the Diagnostic efforts and serve as topics for additional policy notes. For example, the Outcomes Analysis might raise important questions like: i) why have we been unable to penetrate fast‐growing Asian markets with our exports that are doing well in Latin America, Europe, and North America?; ii) what factors are preventing us from upgrading in the light manufacturing sector; and iii) why are survival rates for our exporters particularly low for intra‐regional trade? The Diagnostics can then be organized around answering those specific questions, giving three clear policy notes as outputs. Finally, the learnings from across the three analyses can be brought together to derive overall lessons for trade competitiveness, which would serve as a fifth and final policy note.


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Of course, the issues outlined in Table 3.1 need not be mutually exclusive, and any TCD exercise may

pursue multiple objectives. In any case, it is important to start with a clear understanding of what the TCD

aims to achieve and how it will be used. This will not only help guide and focus the analysis, but will be

critical to facilitate communication with stakeholders who will be involved in the project, and with internal

and external clients who will make use of its outcomes (and indeed may contribute resources to fund it).

With the objectives clarified, the next step is to ensure that resources are mobilized to undertake the TCD,

and that a clear workplan is put in place. A number of project management issuess need to be considered.

Who should be involved?

TCD Team

The TCD is designed to be led by a relatively small core team, most likely comprising 3‐4 staff. At least one

team member should be a trade economist with an understanding of trade policy and competitiveness

issues, as well as technical skills in analyzing trade data. The TTL should ideally have some trade experience,

but most importantly should have in‐depth country knowledge and experience. Given that the TCD does

not intend to conduct in‐depth technical analysis, it should not be necessary to involve technical experts for

each component of the diagnostic. If certain topics are seen to be critical from the outset – in particular

innovation, skills & productivity, or trade facilitation – it may be useful to bring in specialized technical

expertise to lead those components.

For conducting the Trade Outcomes Analysis, it will be important to have a skilled trade data analyst who

is familiar with the main data sources outlined in Chapter 4 and has some experience using Stata. The

World Bank International Trade Department has already automated much of the process and can provide

Stata “do” files that automatically run the analysis and prepare the graphs and figures needed in the Trade

Outcomes Analysis. In a second phase of the toolkit implementation, it is expected that fully automated

tools will be available online that will enable users to simply input data and retrieve results.

Counterparts and stakeholders

In addition to the team leading the data collection and analysis, the success of the TCD will depend on

input from a wide variety of stakeholders in the country, including government officials and the private

sector. This will be important not only for planning and carrying out the TCD, but most importantly in

agreeing on the priority actions and policies that emerge from the process.

Identification and engagement with stakeholders should begin in the early stages of developing the

TCD workplan. This will ensure that key stakeholders are on board with the approach, and will also

help to facilitate access to information and key contacts. While consultation will take place through

individual and focus group interviews, it may also be useful to organize a steering group to oversee the

Diagnostic exercise. Such a steering committee should include both public and private sector

members. Its main role would be to advise and intervene at key points in the Diagnostic process

including: i) endorsing the proposed workplan and methodology; ii) review and endorsement of the

Trade Outcome Analysis Report; iii) review and endorsement of the TCD Final Report; and iv) preparing


11

and endorsing the proposed policy recommendations and program of action.

Given the broad nature of competitiveness, such a committee may need to draw on members from

across a number of different government agencies and industry sectors. A key challenge in this respect

will be ensuring inclusivity while avoiding making the committee too large to function efficiently.

How will the TCD be carried out?

The TCD will be conducted in three main steps as outlined in Figure 3.1. This includes: i) preparation of

the Trade Outcomes Analysis; ii) initial diagnositcs and field preparation, followed by in‐country

Diagnostics field research; and iii) analysis and preparation of the final TCD report.

Figure 3.1: Work stages for the Trade Competitiveness Diagnostic

What time will be required?

The TCD is designed to be completed within a period of 4 months. This would include 4‐6 weeks of

fieldwork (although it could be as little as 2 in a small country), as shown in the Figure 3.1.


12

Chapter 4: Stage 1 – Conducting the Trade Outcomes Analysis

The Trade Outcomes Analysis guides a systematic generation of hypotheses about a country’s export

performance, prospects, and challenges by analyzing what it exports, to whom, how much, and for how

long. It is designed to not only measure past performance but to assess the likely future trajectory of a

country’s trade position. The Trade Outcomes Analysis uses the decomposition of the margins of trade

growth as a framework for exploring trade competitiveness, as outlined in Figure 4.1. We define four

prinicipal factors on which a country’s trade competitiveness performance can be determined: 1.) the level,

growth, and market share performance of existing exports (the “intensive margin”) of exports as well as

market share performance; 2.) diversification of products and markets (the “extensive margin”); 3.) the

quality and sophistication of exports (the “quality margin”); and 4.) the entry and survival of new

exporters (the “sustainability margin”).

Figure 4.1: Decomposition of export growth– a framework for measuring trade competitiveness

There are four main steps in conducting the Trade Outcomes Analysis as shown in Figure 4.2. The Trade

Outcomes Analysis is largely a desk‐based exercise which involves assessing a series of indicators and

analytical tools. The key to a success, however, lies not in the creation of the tables and figures but in their

interpretation, and in the conclusions and hypotheses that are drawn from them. Thus, it is important that

the analysis is grounded strongly in the country context. This means making sure that members of the

country team are directly involved (if the analysis is being conducted by an anchor unit or a consultant) as

well as, if possible, conducting some limited field research. This will allow for stronger analysis and will

ensure that the quantitative report can be illustrated with relevant examples and anecdotes that shed

better light on situation on the ground. The remainder of this chapter provides a basic guideline to

carrying out each of the four steps.

Export growth

Intensive margin: higher volumes of existing products

to existing destinations

Extensive margin: new trade flows

Sustainability margin: entry and survival of new products

and destinations

New products

New destinations

Quality margin: higher quality in existing

products

Source: Authors, derived from Cadot et al (2011)


13

Figure 4.2: Steps to Conducting the Trade Outcomes Analysis

Step 1: Select peer countries

One important decision is which comparator countries to include in the analysis. Some of the indicators will

focus on country‐specific analysis and others on positioning the country of interest in the global landscape,

but for the majority it will be useful to select “peer countries” for comparison. The purpose of the peer

countries is to act as benchmarks against which the relative performance of the country can be assessed.

While there is often much interest in such comparators, it is important to remember that the purpose of

the peer countries is to set the country’s performance in context and not to conduct a comprehensive

ranking or benchmarking exercise. Thus, it is not necessary to include the full range of possible comparator

countries. Moreover, from a practical perspective, interpreting the figures and graphs will be difficult if too

many comparators are included. Thus, somewhere between 4 and 6 peer countries is normally ideal.

Outlining a clear set of criteria for the selection of the peer countries is important given the sensitivity of

many stakeholders to the countries that are considered “peers”. Indeed, while benchmark comparisons can

play a valuable role in engaging in the dialogue with country counterparts, the perception that peer

countries are “inappropriate” can undermine a good analysis. Thus, it is important to come to an

agreement on the peer countries before any final results are presented. Normally the selection criteria will

include some combination of neighboring countries, countries of similar size, economic development, and

economic structure, and possibly countries with whom the country’s exporters compete in global markets.

Step 2: Download and compile data

Data sources

The Trade Outcomes Analysis focuses on the assessment of time series and cross sectional trade data.

While detailed and useful data may be available from national statistical agencies, comparability across

countries and time is critical. As such, the analysis makes use of a few standardized data sources. The large

majority of Trade Outcomes Analysis uses a single data source – United Nations Commodity Trade Statistics

Database that can be accessed via the World Integrated Trade Solution (WITS) database, a software tool

developed by the World Bank in collaboration with UNCTAD, ITC, WTO, and the UN Statistical Division.

Table 4.1: Main data sources for Trade Outcomes Analysis

Source / Location Description and main use

World

Integrated

Trade Solution

(WITS)

Available online http://wits.worldbank.org/wits/ (registration required)

Provides detailed time series data on imports and exports across by country and trade partner based on a range of statistical classifications. Primary source of data for almost all indicators used in the Trade Outcomes Analysis.


14

Source / Location Description and main use

World Trade

Indicators (WTI)

Available online http://info.worldbank.org/etools/wti/1a.asp

Provides pre‐calculated indicators on measures relating to trade growth, services trade, and diversification

ITC TradeMap Available online http://www.trademap.org/ (registration required)

Provides a wide range of indicators and tools (for most of which, the TCD uses WITS instead); in TCD used mainly for mapping of growth orientation

World

Development

Indicators

(WDI)

Available online http://data.worldbank.org/data‐catalog/world‐development‐indicators

Provides a detailed set of time series socioeconomic data across all countries; Used in TCD mainly for:

Basic trends in trade growth Data for context on population, GDP, etc. Technology content of exports

World Bank

Proprietary

data sources

Unit values database (PRMTR) Time series database with unit values at detailed product level for exports to EU countries from all countries ; in TCD used for analysis of export quality

Customs transactions database (DEC)

Detailed time series firm‐level data on exporters based on customs transactions; available in approximately 30 countries; in TCD used for analysis of export dynamics, entry and survival

Revealed factor intensity database (PRMTR)

Database mapping factor conditions of all countries (physical capital, human capital endowments) against products to show revealed factor intensity of products; in TCD used to analyze sophistication of exports and comparative advantage.

Other

CEPPI – available online http://www.cepii.fr/anglaisgraph/bdd/gravity.htm

Dataset for development of gravity models

Product Space Explorer and Product Space Parser – available online www.chidalgo.com

Tool for analyzing product space

Part 2A of the Toolkit provides details on the data sources for each of the indicators and tools of the Trade

Outcomes. Some of these indicators are available pre‐calculated from World Trade Indicators (WTI), or

can be calculated using simple online tools from World Integrated Trade Solutions (WITS) or ITC Trade

Map. The World Bank International Trade Department has already automated much of the process and

can provide Stata “do” files that automatically run the analysis using WITS data, and prepare the graphs

and figures needed for the Trade Outcomes Analysis. In a second phase of the toolkit implementation, a

set of automated tools will be available online, enabling users to simply input data and retrieve results.

Box 4.1 A note on data for the services sector

In recent decades, with the advent of new technologies and policy reforms, services are being increasingly traded between countries. In 2009, global trade in merchandise was valued at US$12.1 trillion and trade in commercial services was valued at US$3.3 trillion.4 There is, however, a severe lack of disaggregated data for services which prevents analysis of rigor at par with what can be conducted for merchandise trade. This imbalance, driven by data availability, is reflected in this Toolkit.

4 http://www.wto.org/english/news_e/pres10_e/pr598_e.htm


15

The broadest definition of services includes all activities outside agriculture, mining and manufacturing that have intangible outcomes. This definition permits a highly heterogeneous inclusion of activities, from banking and insurance, telecommunications and accounting, hotels and architecture, to audio‐visuals, education, health, and construction. In 2007, close to 70 percent of the world’s gross output was accounted for by value addition in services. Yet, because many of these activities were “untradeable” until recently, the share of services in global trade is only around 25 percent. However, trade in services has grown faster than trade in goods since the 1980s. Because of policy deregulation and IT‐enabled technologies, some forms of trade in services no longer require a simultaneous presence of both the producer and consumer which used to be one of the distinguishing characteristics of this trade. Trade in services also subsumes the important subject of direct investment under the logic that services can be provided through “commercial presence” in a foreign market by owners of capital belonging elsewhere. According to UNCTAD, in 2006, 62 percent of inward stock of foreign direct investment was accounted for by services, up from 49 percent in 1990. Despite growing importance, the quality and availability of data on cross‐country trade in services is poor. The main existing source is the IMF Balance of Payments statistics. But this does not capture all categories, and most likely understates. The World Development Indicators (WDI) provides the same information in a more accessible manner with some disaggregation into insurance and financial services, travel and transport. UNCTAD has information on FDI flows and stocks as well as sales by affiliates of multinational companies.

Data nomenclature, classification, and degree of aggregation

Comtrade’s data use two principle classification systems: i) Harmonized Commodity Description and

Coding System (HS) and ii) Standard International Trade Classification (SITC). These are summarized in

Table 4.2. SITC has the advantage of a much longer series since 1962 and fewer revisions. For the Trade

Outcomes Analysis, the level of aggregation of data is tailored based on the tool used. For sectoral

composition and growth HS 2‐digit suffices, whereas for meaningful product‐level analysis, either SITC 4‐

digit or HS 4‐digit are required. HS 6‐digit data offers the most disaggregation, and is the most preferred.

Trade data are disaggregated further at the national level, but cannot be used for comparison or

benchmarking because they have not been harmonized across countries.

Table 4.2: Summary of data classification systems

Classification Degree of disaggregation available Time period of coverage and revisions

HS Up to 6‐digit level for over 5,000

products

Available since 1988 with revisions of

nomenclature in 1988/92 (HS0), 1996 (HS1), 2002

(HS2) and 2007 (HS3)

SITC Up to 5‐digit levels for over 1,000

products

Available since 1962; third revision (SITC Rev3,

from 1988‐2007) is widely used because it gives

maximum comparability over long sample

periods; SITC Rev4 launched in 2007.

Use of mirror data

The use of different sources and techniques to process raw data could result in trade data varying

tremendously across countries. It is usually assumed that the export data reported by developing

countries are less accurate than the import data reported by developed countries for the same flow. This

is because administrative capacities are stronger in developed countries, and because import data are


16

often used for the calculation of import duties, there is greater diligence and regularity involved in their

record‐keeping. For most of the Trade Outcomes Analysis, therefore, “mirror” data should used – e.g. if

calculating exports of Nigeria, instead of using the Comtrade data for Nigeria showing its reported exports

to the world, one should take the data for all countries showing their reported imports from Nigeria.

Firm‐level data

In addition to the macro‐level data sources discussed above, analysis of export dynamics, including detailed

measurement of entry and survival, requires access to data about individual firms. It is therefore valuable,

wherever possible, to access data sources that can provide firm‐level data. Unfortunately, this data remains

difficult to come by and there are no comprehensive sources of cross‐country comparable firm‐level data.

Even in individual countries, accessing firm‐level data is often difficult (where available) due to concerns

over confidentiality. For conducting the Trade Outcomes Analysis, there are two main sources of firm‐level

data that can be considered: i) country‐specific data through an enterprise or industry census; and ii) the

database of customs transactions being developed as part of the World Bank’s (DEC) Export Growth and

Dynamics Project. These are summarized in Table 4.3.

Table 4.3: Sources of firm‐level data – benefits and drawbacks

Benefits Drawbacks

World Bank (DEC) Export Growth and Dynamics Project Database

Data from around 30 countries available, so possible to create benchmark comparisons Detailed data available on export volumes across time, products and trade partners make it possible to create a detailed picture of firm dynamics and study patterns of entry, growth, and survival Data available from a number of low income countries

Lack of data on firm characteristics Only covers exporters so no data to compare exporters and non‐exporters

Census data Allows for links between exports (participation and volume) and other characteristics of firms (e.g. size, productivity, etc.) Provides data on both exporters and non‐exporters, allowing for comparisons of characteristics

Ad hoc availability and access – varies significantly by country; usually restricted to middle and upper income countries Lack of details on exports – usually no data on specific products and markets

Step 3: Analysis and interpretation

Following is a brief summary of each component within the Trade Outcomes Analysis:

Level, Growth and Market Share: Intensive Margin

An analysis of the basic orientation of trade is crucial to judge whether a country’s trade structure is


17

conducive to economic growth. The assessment of level, growth and market share (the intensive margin)

covers a range of issues reflecting the structure and competitiveness of the existing export basket. Table 4.4

summarizes the key issues and indicators covered in this part of the analysis, along with the types of

questions that might be answered – or indeed raised – by the analysis. It also provides a reference to the

page Part 2A of the Toolkit where detailed information on the indicator can be found.

Table 4.4: Summary of indicators and issues – Level, Growth and Market Share

ISSUE INDICATORS QUESTIONS AND IMPLICIT HYPOTHESES REF PAGE

Trade Openness

Trade‐to‐GDP ratio Adjusted trade‐to‐GDP ratio

(1) Relative to countries at comparable levels of income, how integrated is a country in the world? How does the ratio change when it is adjusted to control for population, remoteness, and cost of inland trading?

(2) How has the ratio evolved over the past decade?

37

Trend in Trade Growth

Evolution of export volumes of both goods and services, annual growth rates of total exports, and share of merchandise trade in GDP

(3) Has growth of exports of goods and services been steady? Has trade share of GDP grown in tandem with GDP or faster? What explains deviations from the trend, if any?

40

Export Composition, Revealed Comparative Advantage, and Trade Integration

Total exports (US$) by each (disaggregated) sector, including services, and its share in total exports

(4) How have exports grown at the sector level? Has competitiveness (say, in terms of RCA) evolved differently over time across sectors? Have there be dramatic changes in certain sectors? Why?

(5) How has real export per capita evolved over the past 30 years compared to peer‐countries?

(6) Are export earnings emanating from a diversified economic base, or just natural resources?

(7) Is the country taking part in global production networks? What is the share of intra‐industry trade?

41

RCA of each sector

Compound annual growth rate in exports over a period of 5 to 10 years

Real export per capita

Share of manufactured trade in parts and components

Grubel‐Lloyd Index

Market share

Comparative market share performance in key product

(8) Is a country growing its share in world, regional, or specific country imports in key sectors and products? How are they performing relative to key competitors?

47

Trade Partners

Difference between predicted and actual exports to individual partners obtained from a gravity model

(9) Does a country over‐trade or under‐trade with individual partners, esp. those that are rich, large, nearby, or fast‐growing?

(10) What is the role of preferential trade agreements in boosting bilateral or regional trade?

(11) Does a country have an unusually high or low level of

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Trade Intensity Index penetration in partners that could be considered natural trading allies?

(12) What is the degree of fit between a country’s export profile and a potential partner’s import profile? Trade

Complementarities Index

Growth Orientation of Portfolio

Scatter plot of import growth by countries against a country’s share in those markets

(13) What is the orientation between world growth rate of products and their shares in national portfolio? Are there slow growing products or markets that a country relies on excessively?

(14) What is the experience of exporters in emerging and fast growing markets? What is inhibiting them – search costs, market access, and competitiveness?

52

Scatter plot of world growth of products against a country’s share in those products

Diversification: Extensive Margin

The main argument for diversification of exports is to lessen risk and vulnerability arising from relying on

too much earning from a narrow range of products. Such vulnerability can occur through volatility in

international prices and external shocks beyond an exporter’s control. Recently, diversification and

“discovery” of new exports have also been shown to contribute positive externalities and facilitate higher

productivity, ultimately leading to improved long‐term growth prospects. This section provides tools to

assess: (i) how concentrated are a country’s exports and the markets they serve, (ii) the degree to which

the export portfolio is aligned with products and import markets that are growing in the world economy,

(iii) how the economy has reorganized itself in exporting goods that it always has produced or in taking up

new goods and markets, and (iv) how has the market reach of specific exports (successful or unsuccessful)

evolved over the past decade.

Table 4.5: Summary of indicators and issues – Diversification


Measures of Concentration

Share of top 3 or 5 products in exports

(1) How concentrated are exports in a narrow range of products, or markets?

(2) Is this concentration “benign”? Does growth in concentrated products generate benefits that outweigh potential cost from vulnerability?

56

Share of top 3 or 5 markets in exports

Hirschman‐Herfindahl Index

Theil’s Entropy

Intensive and Extensive Margins

Hummels‐Klenow Extensive and Intensive Margins for both products and markets

(3) Over a decade, has a country added economically significant new products to its portfolio? Has it become a bigger player in products that it had a decade ago? In other words, is a country big in what it exports and how much do those exports matter globally?

(4) Is a country big in markets it exports to, and how much do those markets matter globally?

(5) Who were the entrepreneurs that made those

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breakthroughs? What is their story?

Market Reach of Exports

Index of export market penetration (IEMP)

(6) What were the products that substantially increased the number of markets they serve over a 10‐year period?

(7) Are there many “new” products, or “deaths”? Which were the notable ones, and why?

(8) Compared with peer countries, how much of the potential export relationships has a country exploited?

59

Quality and Sophistication: Quality Margin

What countries produce, and how they produce them, matter for export‐led growth. Products can only be

disaggregated by so much, and it is known that the quality of products within an internationally

harmonized category (such as HS 6‐digit or SITC 5‐digit) can vary immensely. All else equal, goods that

embody greater value addition in terms of ingenuity, skills, and technology fetch higher prices in world

markets. Upgrading product quality, therefore, can be a secure source of both export and economic

growth. This section provides tools to analyze: (i) the “technology”, “income” and “factor” contents of

exports to test if what a country produces are sophisticated and high‐value and (ii) the product space to

know the sectors in which a country has acquired or lost revealed comparative advantage over time

thereby giving a glimpse of the pace of structural transformation in the economy.

Table 4.6: Summary of indicators and issues – Quality


Technological Content

Relative shares of high, medium and low technology goods in total exports

(1) Over a decade or so, has there been a shift away from the country’s dependence on resource and primary exports to medium and high‐tech exports?

62

Unit Values Cross‐country comparison of unit values at the SITC 5 or HS 6 digit level

(2) Given the unconditional nature of unit value convergence, how likely is product upgrading as a strategy to become a secure source of economic growth?

(3) What share of a country’s exports is in industries that are deemed to be price‐elastic relative to industries that are quality‐elastic (Revealed Quality Elasticity)?

63

Sophistication

PRODY; EXPY (4) What is the “income” content of a country’s exports? Does it produce what rich countries produce?

(5) Can a country count on the existing portfolio of exports for future growth, or will it need to augment the process of “export discovery”?

(6) Is sophistication illusory when taking into consideration the share of imported parts and components in final value?

64

Revealed Factor Intensity

RPCI and RHCI indices

(7) Are the biggest export earners above or below the capital content of the median export?

(8) What is the physical and human capital content of exports? What does this imply for efforts to improve

69


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long‐term national endowments?

Product Space

Proximity between products on the Product Space

(9) How has the economy transformed over the past 20 to 30 years in terms of exports in which a country has (had) a revealed comparative advantage?

(10) Are certain products “stuck”, and has there been no movement along the product space (e.g., from garments to machinery)?

(11) What “new” products have emerged? What’s the policy narrative behind them?

(12) Which products embody latent comparative advantage, and what kind of industrial policy is need to nurture them? What industries are protected or subsidized? How can they be oriented towards industrial upgrading? How active a coordinating role will the state have to play to nudge the movement of products on the product space?

71

Entry and Survival: Sustainability margin

The majority of export relationships (at the product‐country level) forged by developing countries do not

survive for more than a few years. Analysis of firm level data is critical to improve the understanding of the

process of entry, exit, and survival in export markets. Assessing the dynamics of export participation and

survival is not only valuable for understanding the competitiveness of a country’s trade sector, but provides

a critical bridge to the Diagnostics stage of the TCD. This is because the nature of firm participation and

survival in export sectors helps to identify which broad factors (entry costs, factor costs, technology and

efficiency) may be the biggest constraints to competitiveness. This section explores, (i) the general

structure of the export sector, (ii) basic descriptive statistics (number, mean, median) of duration of a

country’s export spells at the product‐country level, (iii) the decomposition of export growth into intensive

and extensive margins, and the survival rate of export relationships, and (iv) the extent to which the cause

of death of exports is their defiance of comparative advantage derived from relative factor endowments.

While both aggregate (macro) data and firm‐level data can be used to explore these issues, the use of firm‐

level data gives a much richer and more accurate picture of the dynamics of exporting. However this data

can be difficult to come by.

Table 4.7: Summary of indicators and issues – Entry and Survival


Firm dynamics Number of firms; Number of exporters; nature of exporters (size, FDI share); Export share of production

(1) What has been the trend of export participation? Is exporting accessible for most firms?

(2) How large are typical exports and how reliant are exporters on domestic v export markets?

(3) How important is FDI for the export sector?

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Longevity Kaplan‐Meier survival function; Nelson‐Aalen cumulative hazard

(4) What is the mean/median duration of a country’s export relationship? Is this low or high when compared to peer‐countries?

(5) What export relationships were sustained over the

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function; extended mean graphs

full sample period of 10‐15 periods? Which sector do they belong to (machinery, electronics)?

(6) Which were the countries with which such sustained relationships existed? What explains this beyond geographical, historical or linguistic ties? Is there a BTA/RTA in effect?

(7) Of the spells that lasted only one year or so, is there a dominant group of products or countries? Why?

(8) Decomposing export growth, which constituent of the intensive and extensive margins contributed most and least to export growth? Was it as expected, i.e., intensive margin more robust for well‐established exporters, and the extensive margin more dynamic for start‐up developing countries?

Nature of Export Relationships (decomposition of growth and death)

Growth and survival rates of export relationships

(9) Has a country’s exports risen when analyzed at the country‐product level, and not just at the product level?

(10) What is the extensive and intensive margin of export relationships, as well as the survival rate? Is survival of relationships associated with trade finance, exchange rates, etc.?

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Exports Relative to Factor Endowment

Distance between national endowment and the factor intensity of exports

(11) Is the death of exports associated with the products’ deviation from the national endowment point?

(12) Among new entrants that are ahead of a country’s endowment point, is there a case for government support?

81

Step 4: Drawing conclusions from the analysis – identifying the main competitiveness challenges

After a thorough assessment of trade performance is undertaken under the four themes, the next step is to

hone in on the proximate causes of competitive weaknesses that will be the focus of the Diagnostic

exercise. In general, the broad issues with trade competitiveness can be boiled down to a problem with

products, markets, and/or the general environment for exporters, as illustrated in Figure 4.3:

1. Products:

i. Cost competitiveness: Where countries are found to have problems at the intensive

margin, particularly where they have been experiencing declining share performance in

key export products (across markets), the proximate problems are normally cost‐

related constraints that impact competitiveness at the factory or farm gate.

ii. Extension (diversification) and upgrading (quality): Where unit price performance has

stagnated or declined relative to competitors, or where there the export base remains

concentrated with little success in diversification, proximate problems are typically

quality and innovation related, including constraints related to technology and

efficiency.

2. Markets: Where countries have been experiencing declining share performance in key export

markets (across most products) or where diversification of existing exporters and products into

new markets has been weak, the competitiveness challenges most likely relate to market


22

penetration.

3. General export environment: Finally, where there is a limited export base, with insufficient

creation of new exporters and / or low survival rates of new exporters, the competitiveness

challenges most likely are driven by weaknesses in the general export environment.

In addition to identifying the main issue areas for focus in the Diagnostics, it may be useful to identify both

broad questions around which the Diagnostics exercise can be organized (see an example in Box 4.1); or

even very specific questions at the sectoral level that may serve as a proxy for answering broader questions

about the constraints to competitiveness in the export sector.

Figure 4.3: Linking trade outcomes categories to competitiveness challenges

Box 4.1 Examples of questions arising from the Trade Outcomes Analysis in Pakistan

1. What is preventing the extension of existing export products to new markets? 2. What will it take to shift the export basket to more dynamic markets in Asia, Latin America, etc? –

products and competitiveness, market access issues, etc. 3. Why are average trade relationships of such low value? What are the constraints to deepening trade

relationships? 4. What explains the low rates of export survival outside traditional products and traditional markets? 5. What is preventing Pakistan from expanding exports in more sophisticated export products 6. What is holding back quality upgrading in traditional sectors?

The output of this step – Trade Outcomes Analysis Report – which note only serves as a guide to the

second‐stage Diagnostics, but should be a valuable output in its own right as a comprehensive assessment

of trade performance.

Part 2A of this Toolkit provides an implementation guide to a series of measures and analytical tools that can

be used to assess trade performance for each of the components discussed above. Each tool is described, the

main data sources are identified, a basic description of how to conduct the analysis is provided, and an

example shown.

General export environment

Sustainable entry of new exporters

MarketsPenetration of existing and

new export markets






Cost competitivenessExtension

(diversification) and upgrading (quality)

Products


23

Chapter 5: Stage 2 – Conducting the Competitiveness Diagnostics Following on from the Trade Outcomes Analysis, the Competitiveness Diagnostics proceed through a logical

approach of assessing how various factors may contribute to trade performance. The Diagnostics include

three broad areas of assessment, as illustrated in Figure 5.1:

1. Market access focuses on the external trade policy environment that may facilitate or constrain

exporters from entering and maintaining competitiveness in markets, including tariffs and

quantitative restrictions, preferential agreements, and standards and other technical barriers.

Note that these same issues are covered in the macro‐incentives section on trade policy –

however, in that section the focus is on how it affects imports; here the focus is on exports.

2. Supply‐side factors covers a broad range of determinants in two sub‐categories:

i. The macro‐incentive framework includes factors which establish the broad

environment that influences private sector investment and participation in exports,

including the macro‐fiscal environment, exchange rates, trade and investment policy,

competition, and the governance and regulatory environment.

ii. Factor conditions impact the cost and quality of production; these include: access to

finance, scale economies, labor regulations and skills, firm‐level technical efficiency,

land and infrastructure, intermediate inputs, services inputs, and trade facilitation &

logistics.

3. Trade promotion infrastructure covers the range of interventions by government to address

market failures (coordination challenges, asymmetric information) and government failures

that restrict export participation and performance, including traditional export promotion and

SEZs, industry coordination bodies, standards & certification, and innovation.

Figure 5.1: Competitiveness Diagnostics components (shaded boxes)

There are four main steps in conducting the Competitiveness Diagnostics as shown in Figure 5.2. The

remainder of this chapter provides a basic guideline to carrying out each of these steps.






COMPETITIVENESS DIAGNOSTICS

Market access

channels

Factor and transaction costs Technology and efficiencyEntry costs

Supply side factors Trade promotion infrastructure

Macro‐incentive framework

Factor conditions


24

Figure 5.2: Steps to Conducting the Competitiveness Diagnostics

Step 1: Identifying primary areas of focus for Diagnostics analysis

One of the main challenges for conducting a TCD is the broad‐based nature of competitiveness. The TCD

focuses on issues that impact the trade sector directly, in the short‐to‐medium term, avoiding detailed

assessment of deep determinants like institutions, basic education, and health which will impact trade

outcomes through some observable channels. But even with this, the range of issues noted included in the

Competitiveness Diagnostics is wide. Thus, an important first step in the Diagnostics is to review the Trade

Outcomes results and assess the likely candidates that can be the focus of the initial analysis.

The premise of the TCD approach is that trade competitiveness is not determined by any single constraint.

Instead, the constraints are likely to be multiple and intertwined, and possibly tied to cross‐cutting issues

for which there may not be direct policy fixes from the trade sector. What the diagnostic does is to help

prioritize the incremental alleviation of the most binding constraints to export competitiveness in a world

characterized by scarce resources and trade‐offs among competing choices. For example, trade and

investment policies have a bigger role if the Trade Outcomes Analysis suggests that the county’s openness

to trade and structure of production is misaligned with its comparative advantage; while the role of

technology absorption, innovation, and labor skills is likely to loom large if the country has persistently

failed to upgrade the quality of its exports. There is, however, no one‐to‐one mapping of a symptom to a

cause. This is akin to what Sachs (2005) calls clinical economics, in which a range of diagnostic tests and

understanding of context need to be employed to hone in on the proximate causes of distress.

Table 5.1 provides a checklist of the most likely factors impacting competitiveness for each of the broad

challenge areas that will be defined from the Trade Outcomes Analysis. As can be seen, where the main

challenges are in export entry and cost competitiveness, a wide set of factors may need to be analyzed to

identify the main constraints. On the other hand, when market penetration emerges as the main challenge,

it may be possible to hone in on a much narrower set of issues. The analysis can be taken in stages to

ensure a more efficient use of resources. For example, if market diversification is a major problem in a

country, a logical point of enquiry is to analyze market access barriers and trade facilitation and logistics. If

neither of these is particularly problematic, secondary lines of inquiry may turn to standards and the export

promotion infrastructure. Some factors may impact firms in several different ways, and in fact are

endogenous with other competitiveness factors. Perhaps most noteworthy in Table 5.1 is the impact of

trade and investment policy not only on the incentive framework that determines whether firms decide to

export, but also on the cost and quality of goods and services inputs in their production process.

The checklist in Figure 5.1 is based on the broad existing experience of analytical work on trade

competitiveness. While developing a generalized model linking supply side constraints to trade outcomes is

Step 1:Identify primary areas of focus for

Diagnostics analysis

Step 2:Desk‐based analysis and benchmarking

Step 3:Field research and

interviews

Step 4:Analysis and conclusions


25

difficult given the endogeneity of many competitiveness factors, some preliminary efforts are underway,

through both cross‐country and within country econometrics exercises (see Box 5.1). As these are refined

further, the breadth of analysis that needs to be undertaken in the Competitiveness Diagnostics may be

significantly reduced. At the moment, however, they can only be taken as general tools to assist in guiding

the focus of the analysis.

Table 5.1: Checklist of primary factors impacting competitiveness

Box 5.1: Linking supply side constraints to trade outcomes – econometric approaches

Cross country econometric analysis5

Initial consideration has been given to developing a model to link supply side constraints to trade outcomes. The model starts by organizing the constraints around the three main channels through which they impact exporters: entry costs; factor and transactions costs; technology and efficiency. Building on the trade models of Melitz‐Ottaviano (2008), Del Gatto et al (2006) and Ottaviano et al. (2008), one can model export performance as endogenously determined by a “selection process” in which market size and natural and man‐made trade barriers play a role, given supply side determinants and constraints. Controlling for importer market size and dynamic trade costs one can then focus on the supply side, modeling producer competitiveness for each sector as a Cobb‐Douglas function compounded by fixed costs and some level of technology/efficiency of production in

5 Source: Ottaviano G.I.P. D. Taglioni and F. di Mauro, 2009. The Euro and the Competitiveness of European Firms, Economic Policy, CEPR, CES, MSH, vol. 24, pages 5‐53, 01 and Ottaviano G.I.P.. D. Taglioni and F. di Mauro, 2007 ‐ Deeper, Wider and More Competitive? Monetary Integration, Eastern Enlargement and Competitiveness in the European Union, ECB Working Paper no. 847.

Main challenges identified from the

Trade Outcomes Analysis →

General Export

Environment

CostCompetitiveness

Product extension and Quality

Marketpenetration

PAGE

REF.

Channels Fixed entry costs

Factor costs

Technology and efficiency

Market

access Tariffs and quantitative restrictions

85‐101Non‐tariff barriers

Preferential trade arrangements

Supply side factors

Incentive

fram

ework

Macro‐fiscal environment 102‐119Exchange rates

Trade and investment policy

Competition 120‐131

Regulatory environment and governance

Factor conditions

Access to finance 132‐135

Scale economies

136‐142Labor regulations and skills

Firm‐level technical efficiency

Land and infrastructure 143‐149Intermediate inputs

Services inputs

Trade facilitation and logistics 150‐162

Trade

promotion

infrastructure Export and investment promotion 163‐169

Standards and certification 170‐193

Special customs regimes and SEZs 194‐200

Industry coordination bodies 201‐205

Innovation 206‐221


26

the sector and country. This specification can be used as a basis to identify in one single framework the full set of constraints of competitiveness, by relating them to one or more of the determinants. It is then possible to link the analysis to the various dimensions of trade competitiveness (i.e. growth, diversification, sophistication, survival) mostly by means of interaction terms to the base regression. Country specific econometric analysis

In a background paper prepared for the development of the TCD, Escribano et al (2010) present additional empirical evidence on the relation between total factor productivity, export performance and FDI inflows in 18 developing countries6, based on firm level data from the World Bank Enterprise Surveys. Of particular value for use in the TCD are the country level findings on the percentage contribution of groups of investment climate variables to export and FDI performance – this provides an indication on their relative importance in determining competitiveness. A comparison of the consolidated summary results for African countries and Latin American countries is shown below. While TFP is most important for both, beyond that the factors vary considerably, with exporting by firms in African countries impacted most by factors like power and internal bureaucracy, while Latin American firms are impacted most by informality and bureaucracy at borders.

% absolute contributions of investment climate groups of variables to the probability of exporting

Africa Latin America

In addition to identifying the main areas of focus for the Diagnostics, it is also important to consider how

the scope and focus of the research and analysis may need to be tailored to take into account the specific

context of the country and possibly of the focus sector(s) (if the analysis is being done at the sectoral level).

In Part 2B of this Toolkit, for each of the main competitiveness components, a basic guide is given for how

certain country and sector contexts may require an adjustment to the focus of the research – these

categories are shown in Table 5.2.

6 Turkey, Egypt, Colombia, Mexico, Pakistan, Guatemala, Honduras, Nicaragua, Costa Rica, Peru, Chile, India, Kenya, Senegal, Brazil, Malaysia, Morocco and South Africa

0.47

0.57

0.68

0.86

0.94

0.95

1.15

1.26

1.36

1.50

1.70

2.02

2.04

2.53

2.89

3.50

3.64

3.76

4.88

5.45

5.79

6.02

6.79

8.33

9.36

21.58

0 5 10 15 20 25

Water

Solvency

Training

Quality

Labor relations

Access

Corruption

Innovation

Indstrial zone

Capacity

Other

Openess

Financing

Security/Crime

Firm size

Informality

Labor skills

IT

Competition

Transport

Bur. at border

Corp. Gov.

Age

Internal bur.

Power

TFP

% Contribution

0.00

0.10

0.34

0.71

0.83

0.86

0.90

0.98

1.05

1.36

1.58

1.69

1.73

2.20

2.54

2.55

2.69

2.99

3.55

3.69

5.20

6.70

9.06

11.95

16.68

18.08

0 5 10 15 20

Water

Indstrial zone

Labor relations

Corruption

Solvency

Quality

Other

Openess

Financing

Access

Security/Crime

Training

Age

Firm size

Innovation

Power

Competition

Internal bur.

Capacity

IT

Transport

Labor skills

Corp. Gov.

Bur. at border

Informality

TFP

% Contribution


27

Table 5.2: Summary of country and sector context provided in the TCD Toolkit

Country contexts Sector contexts

Small (population) and remote / landlocked

Resource‐rich

Low income, labor‐abundant

Middle income

Light manufacturing

Agriculture

Tourism

Business services

Step 2: Desk‐based analysis and benchmarking

Taking the econometrics as an initial guide of where to focus, the Diagnostics analysis begins with desk‐

based research focused on each of the areas identified in Table 5.1. The purpose of the desk‐research is

two‐fold: to make full use of the existing quantitative and qualitative evidence available to assess how

specific factors influence trade competitiveness; and to assist in preparing the field research. This step

involves three main types of research: i) qualitative analysis making use of secondary sources, including

recent studies and reports; ii) quantitative analysis based on data from any existing country‐specific surveys

or census; and iii) quantitative benchmarking comparing performance against a set of peer countries. Table

5.3 presents a brief summary of each of these analytical approaches.

Table 5.3: Summary of key analytical tools for desk‐based analysis

Analytical tools

Role and comments Risks / shortcomings

Qualitative analysis

Focus on learning from previous assessment of competitiveness factors

This should draw on secondary sources (Country Strategy reports, CEMs, DTISs, policy analyses, sector studies, etc.) from the World Bank, other IFIs, donors, governments, etc.

Qualitative analysis of secondary sources should always be confirmed through interviews

Can be biased depending on the sources of information

Risk that information and conclusions becomes obsolete quickly

Census and survey data

Detailed firm‐level data may be available to provide valuable time series indications on factors contributing to competitiveness (input costs, factor proportions, productivity, etc.)

Unlikely to be comparable across countries

Unavailable in most developing countries

Often data problems; require significant care and cleaning of data

Quantitative Benchmarking

Given the relative nature of competitiveness, comparisons are an appropriate analytical tool

Effective way to communicate performance in a non‐technical way

Helps not only to gauge performance but to give parameters on the potential levels of improvement that are possible

Of limited use in identifying which constraints are most binding and often fails to identify links across components – treats issues individually

Risk of irrelevant comparisons / risk of jumping to conclusions without controlling properly (critical to have an appropriate peer sample)

The data sources for comparative analysis of Diagnostics are more dispersed than for the Trade Outcomes.

However, a number of the most important sources are summarized in Table 5.4. Specific details on the

range of indicators relevant for each topic are included in Part 2B of the Toolkit. These cover mainly the


28

quantitative data for the benchmarking exercise. The qualitative analysis will necessarily be dependent on

what reports have been done in the specific country of interest.

Table 5.4: Main data sources for Competitiveness Diagnostics desk research

Source / Location Description Relevance by component

Market Access

Incentive Framework

Factor Inputs

Trade Promotion

World Trade Indicators (WTI)

Available online http://info.worldbank.org/etools/wti/1a.asp

Pre‐calculated indicators on measures relating to tariffs and other trade policy restrictions by country

WITS – TRAINS database

Available online http://wits.worldbank.org/wits/ (registration required)

Detailed time series data on tariffs by product and trade partner

World Bank Doing Business

http://www.doingbusiness.org

Comparative cross‐country indicators on investment climate characteristics

World Bank Enterprise Surveys

http://www.enterprisesurveys.org/ (registration required for microdata)

Detailed firm‐level data available across most countries on factors relating to investment climate

World Economic Forum Global Competitiveness Index

http://gcr.weforum.org/gcr2010/

Comparative data on measures of competitiveness – includes “hard data” and perceptions from surveys

ILO Key Indicators of the Labor Market

http://www.ilo.org/kilm

Time series data covering 20 indicators of national labor markets

International Comparison Program Dataset

www.worldbank.org/data/icp

Cross‐country comparative price data on a range of key inputs (at consumer level)

ITU ICT Indicators Database

http://www.itu.int/ITU‐D/ict/publications/world/world.html

Time series data across countries for 150 different telecommunication and ICT statistics

World Bank Logistics Performance Index

http://go.worldbank.org/88X6PU5GV0

Comparison of indicators of perceived trade facilitation and logistics environment across 155 countries

UNCTAD FDI database

http://unctadstat.unctad.org

Time series data on FDI flows by country and broad sectors

WIPO Patent database

http://www.wipo.int/pctdb/en/

Time series data on patent filings

WTO Trade Policy Reviews

http://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm#bycountry

Reports (qualitative and quantitative) assessing countries’ trade and investment policy environments


29

The results from this analytical exercise will provide some indications on which competitiveness factors a

country performs particularly well or badly. This can establish additional hypotheses to test in the field and

questions for further research. The desk research should also compile contact information for individuals

and organizations that should be contacted for meetings as part of the field research. Part 2B of the Toolkit

includes a list of potential contacts for each component.

Step 3: Field research and interviews

Field research is critical to conducting any TCD. This is normally the source of critical insights that connect

quantitative benchmarks with observed performance. Depending the level of detail required and the

number of issues being covered, field research can take anywhere from just a few weeks to six weeks or

more. Three primary forms of analysis are used in the TCD for conducting field research: semi‐structured

interviewing, surveys, and value chain analysis.

Table 5.5: Summary of key analytical tools for the assessment

Analytical tools

Comments Risks / shortcomings

Stakeholder interviews

This should be the core tool used in the data collection process

Selection of interview targets should be broad, covering all key stakeholders (see suggestions in Section 2B)

Should draw on a relatively standardized questionnaire or discussion guide, but managed as a semi‐structured discussion

Risk of “camels and hippos” scenario – i.e. drawing conclusions from the people who are in the market rather and excluding those cannot or choose not to operate

Risk of biased input due to vested interests or biased perceptions (critical to have broad sample)

Risk of obsolescence / volatility of response due to time‐specific issues

Surveys In most cases, the TCD can take advantage of existing surveys undertaken by the World Bank Group, in particular the Enterprise Surveys, but additional business surveys may also need to be conducted as needed

Risk of “camels and hippos” scenario

Risk of obsolescence / volatility of response due to time‐specific issues

If undertaking original surveys, sample selection is critical to avoid bias

Value chain analysis

Provides detailed quantitative and qualitative assessment of competitiveness from the perspective of an investor

Identifies constraints at the sector level, looking at all activities from sourcing through all levels of production, packaging and delivery to end markets.

Must be done at the product level

Resource intensive approach

Data often necessarily based on limited number of firms, so cost averages must be viewed cautiously

Risk of obsolescence as conditions and cost structures can change quickly

Value chain analysis (see Box 5.2) can provide the most detailed output, and in fact would normally include

interviews and surveys as part of its approach. As such many Diagnostic may use the value chain approach

as its main analytical framework. However, in order to get specific results, the value chain analysis must be

done at a level more discrete than even the sector – normally at the level of a product or small group of

products. Moreover, the cost and time required to undertake value chain analysis will not always be

feasible or practical. In some cases, simply combining detailed interviews of firms and other stakeholders

with the desk‐based analysis can generate the insights needed to understand how certain constraints

impact competitiveness.


30

Box 5.2: Value chain analysis

A value chain describes the full range of activities that brings a product or service from its conception to its end use (and disposal), including design, the sourcing and transformation of raw materials, production, packaging, marketing, and distribution. At an industry level, it combines the industry supply chain with the concept of the value that is added in each step of the process. The value‐chain analysis framework centers around three major segments that describe each production link in the value chain: source, make, and deliver. Each activity mapped in the value‐chain diagram can be represented by a cost breakdown. In addition to mapping the value chain, a value chain analysis typically includes measurement of the chain’s performance, establishment of benchmarks (e.g. of cost, time, and quality relative to other countries), and finally, analysis of the performance gaps, and the factors that contribute to them.

Example: Apparel value chain

In a diagnostic focusing on a specific sector (for example, apparel as outlined above), value chain analysis could cover core components of the diagnostic, including all aspects of factor inputs / factory gate “competitiveness”, transport and trade facilitation, standards and certification and parts of the internal and external trade policy environment. This would be supported by other tools (e.g. standard interviews and textual analysis) to analyze aspects of the incentive framework and the trade promotion environment. Source: World Bank (2009), Clusters for Competitiveness: A Practical Guide & Policy Implications for Developing Countries, Washington, DC: World Bank; Gereffi, G. and Frederick, S. (2010), Global Apparel Value China, Trade, and the Crisis: Challenges and Opportunities for Developing Countries, Policy Research Working Paper 5281, World Bank.

Part 2B of this Toolkit provides guides for conducting interviews on each of the competitiveness

components, including a list of potential interview targets. Following are some suggestions and tips for

planning and conducting field interviews:

Recognize the cross‐over in topics: Particularly in interviews with the private sector, the same individuals may need to be interviewed on more than one topic. Careful planning is needed to ensure that organizations are not contacted twice, and that as many of the issues that need to be covered are well integrated into a single interview session.

Plan to ensure a balanced sample: The sample frame for interviews will need to balance public v


31

private sector v other stakeholders; mix of sectors; firm sizes; local v FDI firms; etc. Making sure the sample is relatively balanced is critical to avoid bias in the input received.

Different focus and strategy for public v private sector meetings: Interviews with the public sector should focus primarily on understanding existing challenges and process, as well as proposed policy changes; private sector interviews should focus on identifying binding constraints and exploring how firms respond to the competitiveness challenges and constraints identified.

Communicate effectively in advance of the meeting: Provide a letter / email outlining clearly the objectives and the issues to be covered in the discussion.

Make sure the interviewee is the right person / people: It is critical that interviewees are in fact people knowledgeable with the subjects to be discussed – ask specifically in advance communications to ensure that certain people / positions are represented.

Number of interview participants: For the purposes of credibility, it is important to have people with specific experience and knowledge on the subjects to be discussed. But this needs to be balanced with keeping the team small enough not to overwhelm the interviewee(s) or to make the meeting inefficient. A team of 2‐3 is usually ideal.

Clarify objectives up front: Re‐state the context, objectives and agenda for the meeting up front.

Time expectations: Few interviewees will want to plan for more than one hour. On the other hand, if they are engaged in an interesting discussion, many will be happy to carry out. Set some expectations up front, and aim for something in the range of one to one‐and‐a‐half hours.

Semi‐structured approached: Use the communicated agenda as a guideline, but focus on having an open‐ended discussion rather than a “question‐answer” session. This is more likely to keep the interviewee interested, and provides greater scope for “unscripted” issues to be introduced.

Step 4: Analysis and conclusions

Combining a number of the different quantitative and qualitative tools discussed in this section can allow

the practitioner to identify the main elements connecting supply side factors to trade competitiveness. The

specific insights generated by each tool will contribute to increase the accuracy of the diagnostics,

narrowing down the number of candidates to be identified as constraints for trade competitiveness. While

the intention is to avoid a “laundry list” of policy areas to be addressed, it must be recognized that it may

not be possible to arrive to a simple diagnosis, let alone to identify a single binding constraint. The use of

different tools may well suggest different conclusions at some points of diagnostic. This is unavoidable and

the only way to address this is through the judgment of the practitioner. It is for this reason that the team

doing the final analysis should include a combination of trade expertise, some subject expertise (who will

have seen it all before in a different context), and most importantly country expertise (who have an in‐

depth understanding of the local context).

One way of identifying the relative importance of the constraints is to combine the findings from the first

and second stages of the TCD to identify where there is weak competitiveness performance in factors that

typically matter most for the competitiveness challenges identified in the Trade Outcomes Analysis. In the

example show in Table 5.6, the Trade Outcomes Analysis identified the primary competitiveness challenge

to be product related, particularly in terms of quality upgrading, with a secondary challenge related to the

dynamics of export entry and survival. In several of the areas that typically explain competitiveness

challenges in these areas, the example country is performing particularly poorly, specifically in: labor

regulations and skills, technical efficiency, standards, and innovation.


32

Table 5.6: Illustrative Summary of Diagnostics results

Trade competitiveness challenges

Primary Product extension and quality

Secondary General export environment

Market Access

Tariffs and quantitative restrictions ‐‐

Preferential tariff arrangements +

Standards and TBTs X

Supply side: Incentive

framework for trade

Macro‐fiscal environment ‐‐

Exchange rates ‐‐

Trade and investment policy X

Regulatory environment and governance X

Competition ‐‐

Supply side: factor inputs

Access to finance X

Scale economies +

Labor regulations and skills XX

Technical efficiency XX

Land and infrastructure ‐‐

Intermediate inputs ‐‐

Services inputs ‐‐

Trade facilitation and logistics X

Trade promotion infrastructure

Standards and certification XX

Export and investment promotion ‐‐

Innovation XX

Special customs regimes and SEZs ‐‐

Industry coordination bodies ‐‐

+ positive impact on competitiveness ‐‐ no major impact on competitiveness X some negative impact on competitiveness XX significant negative impact on competitiveness

Typical areas of focus based on primarytrade competitiveness challenges Typical areas of focus based on secondary trade competitiveness challenges

With the primary issues identified, the practitioner can move on to consider the potential policy responses to the main competitiveness constraints. Part 2B of this Toolkit includes a detailed implementation guide on each component of the Competitiveness

Diagnostics, covering: its relevance to competitiveness, how to measure it, and interview guides.


33

Chapter 6: Stage 3 – Moving from Analysis to Policy Options

Once the main constraints are identified through the Competitiveness Diagnostics, the next step is to

translate these into policy and / or technical assistance projects that address the specific constraints. Policy

is complex and almost always context dependent. It is, therefore, not realistic to outline a detailed set of

prescriptions linked to each of the possible constraints that may be identified through the Diagnostics.

Identifying policy remedies and project components

Table 6.1 presents an overview of broad policy areas linked to each main component of the

Competitiveness Diagnostics, with reference to the relevant page numbers in Part 2C of the of Toolkit

where the practitioner can find more details on potential policy measures and project components.

Table 6.1: Summary of broad policy areas linked to Diagnostic components

Broad policy areas Market access

Supply side: incentive framework

Supply side: factor inputs

Trade promotion

infrastructure

REF PAGES

Market Access 223

Trade policy 225

Investment policy 225

Business environment, governance and institutional policy

227, 230

Competition policy 227

Labor markets and skills 233

Infrastructure and energy 236

Transport and logistics policy 238

Investment and export promotion policy

242‐249

Sector and spatial policy 247‐249

Science and innovation policy 250

Stakeholder consultation and workshop

As part of the process of moving to policy recommendations, the team conducting the TCD should consider

including some process of stakeholder review and consultation. This may include individual consultations

with key individuals, but possibly also a wider stakeholder workshop. The workshop would be a half‐day or

one‐day meeting where the main findings are presented and discussed. The stakeholder workshop is

designed to test the results from the analysis as well as some the policies and projects being proposed. The

stakeholder workshop should ideally be held only after a draft final report has been reviewed and endorsed

by the steering committee (if there is one). Results from the stakeholder workshop should then be

incorporated into the final report and policy recommendations.

Part 2C of the Toolkit, provides more details to assist in thinking about policy options, including:

Brief summaries of potential policy remedies and technical assistance project components that may be relevant to the specific issues identified; and

Case studies of good policy practice from developing countries

PART 2: IMPLEMENTATION TOOLKIT TRADE OUTCOMES ANALYSIS

34

PART 2: IMPLEMENTATION TOOLKIT


35

Introduction to the Implementation Toolkit The remainder of this Toolkit is designed for practitioners for use in planning and carrying out a Trade

Competitiveness Diagnostic. It is structured in three sections, along the main activities of the TCD:

i. Trade Outcomes Analysis

ii. Competitiveness Diagnostics

iii. Policy Options for Competitiveness and Case Studies

Each section provides detailed information to assist the practitioner both in carrying out the exercise and

analysis, and also in understanding the theory and logic behind the specific indicators and analytical

approaches in the Diagnostic.

Part 2A – Trade Outcomes Analysis – is organized around the four main components that are used to

define trade competitiveness in the TCD: growth and share (intensive margin); diversification (extensive

margin); quality and sophistication (quality margin); and entry and survival (sustainability margin). Within

each of these, a series of indicators and tools are presented, which should be used in conducting the Trade

Outcomes Analysis. For each indicator, Part 2A provides information on the data required and where to

source it, the type of analysis that needs to be conducted, and the types of graphs and figures that are

used. It also includes a discussion of the role of the measure or tool and any issues that should be

considered in interpreting the results.

Part 2B – Competitiveness Diagnostics – is also organized around four broad areas: market access; supply

side – incentive framework; supply side – factor inputs; and trade promotion infrastructure. Across these

four areas, 11 factors that impact competitiveness are profiles. In each of these factors, the

Implementation Toolkit provides valuable information to facilitate the analytical process, including:

o How it links with competitiveness challenges identified in the Trade Outcomes Analysis

o Quantitative indicators and data sources

o Interview targets, a guide to issues for discussion in the interviews, and where relevant, a

discussion of the analytical approach to the assessment

o Background reading on the issue, including how the factor links with trade competitiveness.

Part 2C –Policy Options for Competitiveness and Case Studies – provides some initial information to

enable the practitioner to begin thinking about the relevant policy areas that may be considered in

addressing competitiveness challenges identified in the TCD exercise. For each of the broad areas covered

in the Competitiveness Diagnostics, section 2C provides a limited list of potential policy options and one or

two case studies showing an example of good policy practice from a developing country.

Note that this section of the Toolkit is not designed to be read through from start to finish. Instead, it is intended that the practitioner will refer to it throughout the process of conducting a TCD exercise for guidance on tools, frameworks, interview guides, good policy practice examples, and theoretical background relevant to the specific issue(s) they are assessing.


36

Part 2A: Trade Outcomes Analysis


37

Growth and Share – the intensive margin

Trade Openness

Indicators Summary of data needs and sources

Trade‐to‐GDP ratio; Adjusted trade‐to‐GDP ratio

Collect variables as follows for specific years for all countries: total export and import of goods and services, GDP per capita, population (WDI); Remoteness calculated from GDP and bilateral distance data from CEPII; Cost of inland trade from Doing Business. Run a cross‐country regression

The Trade‐to‐GDP ratio is one of the most basic indicators of openness to foreign trade and economic

integration. It weighs the combined importance of exports and imports of goods and services in an

economy. The ratio gives an indication of the dependence of domestic producers on foreign demand and of

domestic consumers and producers on foreign supply. A narrower measure of the ratio of exports to GDP is

also used to assess the general acceptability of home commodities at competitive prices and standards in

foreign markets. However, because imported inputs can play a big role in the success of exports, a

combined look at imports and exports is common. Further, a measure of “real” outward orientation has

been suggested to adjust export‐to‐trade ratios with the imported input share by industry (UNCTAD, 2009).

This reflects how secure an export industry is to not only changes in sales prices but also exchange rate

fluctuations. However, the intensive data requirements mean that this measure is not commonly used.

Figures 2A.1 (i) and (ii) show scatter plots of averaged trade‐to‐GDP ratios from 1996 to 1998 and from

2006 to 2008 against the log of GDP per capita in PPP (constant international dollars). The broken line

indicates the world median income; and the curve is an ordinary least‐squares (OLS) regression line of the

trade‐to‐GDP ratio on the log of GDP per capita as well as its squared value. This reflects a stylized fact that

countries tend to trade more, relative to nominal GDP, as their per capita incomes rise, but at a decreasing

rate. Note, however, when trade is divided by real GDP in PPP terms (and not nominal GDP) the

relationship is slightly different because “real” openness corrects for distortions created when non‐traded

goods are priced differently across countries (Alcala and Ciccone, 2004). It can also be valuable to look at

the changes in trade openness over time to assess the relative degree to which a country has integrated

into global markets. For example, as shown in Figure 4.1(ii), while Pakistan’s trade openness has remained

stagnant in the past decade, countries like India, China, and Vietnam have experienced remarkable growth

in integration.

It is difficult to say whether a country’s ratio is low or high without putting other characteristics in context.

All else equal, large countries in terms of geography and population tend to have a lower trade‐to‐GDP

ratio than smaller countries because they have the option of undertaking a bigger share of trade within

their borders. The large countries to the right of the global median income, such as the United States and

Brazil, trade less than what would be predicted for countries at their level of income per person; small‐

sized rich countries such as the Netherlands and Belgium trade much more than would be expected for

countries at their level of income.


38

Figure 2A.1(i) and (ii): Openness to trade

IND

CHN

BRA

VNM

USA

DEUGBR

BEL

NLDPRY

UGA

ZMBLBR

CRI

AUSPAKBDI

05

01

001

502

002

50

Tra

de

to G

DP

(%

), 1

996

-98

6 7 8 9 10 11Log of GDP per capita (PPP, av. 1996-98)

Openness to Trade 1996-98

IND

CHN

BRA

VNM

USA

DEU

GBR

BEL

NLD

PRY

UGA

ZMB

LBRCRI

AUSPAK

BDI

05

01

001

502

002

50

Tra

de

to G

DP

(%

), 2

006

-08

6 7 8 9 10 11Log of GDP per capita (PPP, av. 2006-08)

Openness to Trade 2006-08

But income is not the only determinant of a country’s openness. As mentioned, structural characteristics

such as population and geography greatly matter. All else equal, landlocked countries are more

disadvantaged to trade than countries with access to navigable rivers or sea. A better measure of what a

country can be expected to trade given its structural characteristics can be obtained from a parametric

analysis of trade‐to‐GDP ratios regressed on GDP per capita, population, remoteness, and a measure for

general cost of trading (which is correlated with landlockedness).


39

Table 2A.1: Adjusted Trade Openness Ratios, 2006‐08

(1) (2) (3) (4) (5)

Actual

Trade/GDP

Potential

Trade I/GDP

Potential

Trade II/GDP

Potential

Trade III/GDP

Potential

Trade IV/GDP

Liberia 114.5 68.2 57.6 70.4 71.3

Burundi 57.7 68.2 57.7 57.5 54.7

China 70.3 88.4 91.4 55.9 50.9

United States 28.2 104.6 99.5 64.7 52.7

India 49.2 83.4 85.5 50.9 48.4

Australia 42.6 102.6 99.4 88.7 69.0

Source: Values in column 1 from WDI; values in columns 2‐5 obtained from regression analysis

In Table 2A.1, the “predicted” trade ratios (columns 2 to 5) differ substantially from the actual trade ratio

(column 1) depending on the specification used. Column (2) is a predicted trade ratio when the actual trade

ratio is regressed on per capita income. For a country at its level of per capita income, Liberia appears to be

much more integrated than its peers. Burundi’s actual trade ratio is slightly lower than what is predicted;

yet when the square of the log of per capita income is included as an additional regressor (column 3), the

predicted trade ratio for Burundi is identical to its observed ratio. When population and the cost of trading7

are included as additional regressors (column 4), the gap between actual and predicted trade ratios

narrows confirming that large countries like the US and India rely more on domestic trade. When

remoteness is added as a regressor (column 5), the predicted trade ratio of “remote”8 countries like

Australia is closer to the actual ratio. The table highlights that even after adjusting the trade ratio to take

account of additional characteristics, larger countries tend to trade less than smaller countries relative to

the size of their economy.

Figure 2A.2 reflects the adjusted openness for some landlocked countries. The ratios are “residuals” of the

regression in column (5) for two time periods ten years apart (1996‐98 and 2006‐08). Negative residuals

mean that even after controlling for a country’s structural characteristics it trades less than it is predicted

to. Over the past decade, Bolivia and Uganda have both narrowed their “under‐trading.” Zambia and

Paraguay remain vibrant traders. While Bhutan has increased its adjusted openness substantially over the

past decade, Nepal has seen its level of integration shrink dramatically.

7 Population is the log of a country’s total population, averaged between 2006 and 2008. The cost of exporting is proxied by a sub indicator from Doing Business 2010 which measures fees levied on a 20‐foot container for documents, customs clearance and broker fees, terminal handling charges and inland transport. The cost does not include customs tariffs and duties, costs related to ocean transport, or bribes. 8 A country’s remoteness measure is a GDP‐weighted average distance between a country and all its trading partners. Weights are calculated by dividing the GDP (current US$) of each partner by an assumed World GDP of US$55 trillion, for the years 2006‐08.


40

Figure 2A.2: Adjusted Trade Openness

Trends in Trade Growth


Evolution of export volumes, annual growth, and trade share in GDP

Data from WDI; basic calculations and plots

One of the first indicators of export orientation is to begin by looking at the broad trend in growth of trade

over the past 15 to 20 years. How has total exports (of goods and services) grown? Is growth sustained? In

Figure 2A.3(i), Indonesia’s growth of total exports (in nominal US$) is seen to have grown from under

US$30 billion in 1990 to over US$ 150billion in 2008. Growth rate has been steady and impressive, except

during the aftermath of the 1997‐98 Asian financial crisis as well as (a smaller dip) after 2001.

In the adjacent figure, share of merchandise exports and imports in GDP are plotted for Indonesia and an

aggregate category of lower‐middle income countries to which it belongs. As countries become richer over

time, they trade more. This is confirmed by the lower‐middle income countries whose volume of goods

trade, relative to the economy, has risen from 35 percent in 1990 to 60 percent in 2008. The corresponding

share of goods trade for Indonesia falls within this range, from 41 to 52 percent over the period, except

during the crisis years when trade dropped, but GDP shrunk by a bigger percentage elevating the share of

goods trade to “abnormal” levels between 1998 and 2001. The growth of constituent product categories

within goods export is covered in a subsequent subsection; what will have to be noted is that many low‐

income countries depend on a narrow range of commodity exports. In such cases, it will be necessary to

decompose the extent to which export growth is driven by rising world prices for such commodities and an

increase in output.

‐25.4‐23.5

‐13.6

4.56.9

26.8

‐9.0

2.9

‐11.3

4.4

‐21.9

22.7

Bolivia

Bhutan

Uganda

Zambia

Nepal

Paraguay

1996-982006-08


41

Figure 2A.3(i) and (ii): Analyzing broad trends in trade growth

Composition of Exports (goods and services), Revealed Comparative Advantage, and Trade

Integration


Total exports (US$) by each (disaggregated) sector, and its share in total exports

Disaggregate overall export figures (from WITS) into meaningful categories, such as that proposed by Hanson (2010) or Leamer (1984); Calculate RCA and changes for comparison between two time periods; Share of trade in parts and components can be calculated by coding Comtrade trade into final goods and parts and components as per Athukorala and Menon (2010).

RCA of each sector

Compound annual growth rate in exports over a period of 5 to 10 years

Real export per capita

Share of parts and components in manufactured exports

Grubel‐Lloyd Index

Export composition

To assess how a country’s exports have performed, it is useful to compare the changing shares of export by

industries over time. Ideally, this is to be done for both goods and services. However, reliability of cross‐

country data for export of services is poor. For an indicative exercise, Table 2A.2 computes the compound

annual growth rate of exports in both services and goods between 1998 and 2008 for five developing

regions of the world as well as selected countries. The data on services exports are calculated by

subtracting merchandise exports from combined export of goods and services in the World Development

Indicators (WDI) database.9 However, the export‐related data in WDI reflect figures reported by the

exporting countries themselves – i.e. it is not based on mirror data. Therefore, the quality of the data must

9Exports of goods and services in WDI represent the value of all merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments.

-40

-20

02

04

0A

nnu

al G

row

th R

ate

(%

)

05

01

001

50

Tot

al E

xpor

ts (

US

$ b

illio

n)

1990 1995 2000 2005 2010Year

Export value (US$ billion) Growth of Exports

Indonesia, 1990-2008Growth Rate of Total Exports

20

40

60

80

100

Sh

are

(%

)

1990 1995 2000 2005 2010Year

Indonesia Lower-Middle Income Countries

Indonesia and Peers, 1990-2008Share of Merchandise Trade in GDP


42

be taken with some suspicion.

Figure 2A.4 illustrates the growth in nominal US dollars the expansion in the exports of merchandise goods

and services for some countries. India’s annual growth rate in services between 1998 and 2008 was higher

than its growth rate for goods, whereas the reverse is true for China.

Figure 2A.4: Compound Annual Growth Rate (%) of Goods and Services Export, 1998‐2008

The table below reports similar growth rates, as well as the share of services exports in total exports for

five developing regions of the world.

Table 2A.2: Annual Growth Rates and Share of Services Exports, 1998‐2008

Av. Growth Rate in

Services Exports,

1998‐08

Av. Growth Rate in

Goods Exports,

1998‐08

Share of Services in

Total Exports,

2008

Share of Services in

Total Exports,

1998

East Asia &

Pacific

17.31 17.73 11.44 11.80

Europe &

Central Asia

9.58 19.92 13.84 28.37

Latin America

& Caribbean

7.88 12.08 11.86 16.47

South Asia 17.29 15.66 27.61 24.91

Sub‐Saharan

Africa

8.92 16.58 11.26 20.02

Source: Computed from data in WDI

20.51

12.77

20.49

16.98

7.87

22.76

5.79

18.27

10.87

9.46

China

Costa Rica

India

Morocco

SenegalGoods

Services


43

In Table 2A.3, merchandise exports are clustered across industries, following Hanson (2010), that share

similar factor intensities and are likely to rely on similar technological or institutional foundations as a basis

for production. For example, the first sector includes land‐intensive activities surrounding agricultural

production; the second includes manufacturing activities that use agriculture, forestry and other land‐

intensive inputs.10

Revealed Comparative Advantage

In Table 2A.3, columns 1 and 4 state the total value of exports by sector (in nominal terms) across two

periods (2000 and 2008, for Costa Rica in this example). When divided by population and expressed in real

terms, exports per capita can be a good indicator to judge how successful a country has been in facing

international competition (see Figure 5(i) for the evolution of export per capita for Brazil, Russia, India, and

China after 1978). Columns 2 and 5 indicate the share of those export sectors in the two time periods which

when divided by the world share of those sectors in total world exports gives the Revealed Comparative

Advantage (RCA) in columns 3 and 6.11

ik

iik

wk

w

x

XRCA x

X

An RCA index above unity indicates that a country’s share of exports in a sector exceeds the global export

share of the same product. However, because high export volumes can result from subsidies or other

incentives provided, including under‐valued exchange rates, RCAs have been argued to be a misnomer in

the sense that they are a better measure of competitiveness than comparative advantage (Siggel, 2006).

Column 7 is an annual average of the growth rate of export sectors. Column 8 captures the change in Costa

Rica’s share of each sector in the world multiplied by the share of world export of each sector in total world

exports in the initial year (2000). This is one of several ways to measure competitiveness.

Table 2A.3(i): Change in Costa Rica’s Shares of Goods Exports, 2000‐08

(1) (2) (3) (4) (5) (6) (7) (8)

Sectors Exports

2000

(US$ ‘000)

Share

2000

(%)

RCA

2000

Exports

2008

(US$ ‘000)

Share

2008

(%)

RCA

2008

AGR

(%)

Comp.

1 Agriculture, meat

and dairy, seafood

(HS 1‐10, 12‐14)

2,110,849 29.55 7.05 4,164,910 24.4 6.05 7.03 ‐0.0056

10 Hanson (2010) classifies products in the Harmonized Commodity Description and Coding System (HS). An alternative is suggested by Leamer (1984) for products following the Standard International Trade Classification (SITC). See Annex III. 11 RCA of product k in country i is the export of product k relative to the country’s total exports divided by the world’s export of product k relative to total world exports.


44

2 Food, beverages,

tobacco, wood,

paper (HS 11, 15‐24,

44‐48)

538,537.6 7.54 1.18 1,261,659 7.38 1.31 8.89 0.0007

3 Extractive industries

(HS 25‐27, 68‐71)

117,776.5 1.65 0.12 213,379.2 1.25 0.06 6.12 ‐0.0010

4 Chemicals, plastics,

rubber

(HS 28‐36, 38‐40)

365,839.6 5.12 0.44 867,462.1 5.07 0.39 9.02 ‐0.0008

5 Textiles, apparel,

leather, footwear

(HS 41‐42, 50‐65)

943,280.6 13.21 1.77 426,860.5 2.50 0.50 ‐7.62 ‐0.0111

6 Iron, steel, and other

metals

(HS 26, 72‐83)

118,068.5 1.65 0.24 391,492.3 2.29 0.23 12.74 ‐0.0001

7 Machinery,

electronics,

transportation equip.

(HS 84‐89)

2,693,129 37.70 0.90 8,566,144 50.09 1.46 12.27 0.0256

8 Other industries

(HS 37, 43, 49, 66‐67,

90‐97)

255,563.4 3.58 0.51 1,219,026 7.13 1.20 16.91 0.0054

Source: Computed using mirror data in Comtrade

Table 2A.3(ii): Change in Costa Rica’s Shares of Services Exports, 2000‐08

(1) (2) (3) (4) (5) (6) (7) (8)

Sector Exports

2000

(US$ ‘000)

Share

2000

(%)

RCA

2000

Exports

2008

(US$ ‘000)

Share

2008

(%)

RCA

2008

AGR

(%)

Comp.

1 Services 1,940,271 25 1.28 4,034,862 29.66 1.43 9.58 ‐‐‐

Source: Computed using data in WDI

Ideally, Tables 2A.3 (i) and (ii) would be merged to treat goods and services exports (as well as their

constituents) in a comparable manner so that a shift in the economy from goods to services or vice versa

could be tracked. However, when sources of data are different, they will not be comparable with precision.

Here, goods data is collected from mirrored statistics in Comtrade, whereas services data is from balance of

payments statistics in WDI. Despite this caveat it is not difficult to see that services exports are becoming

more important in Costa Rica, with increase in revealed comparative advantage over 8 years.

In goods exports between 2000 and 2008, we note two major structural changes: (i) the absolute value as

well as the national and global share of textiles, apparel, leather and footwear (sector 5) dropped

significantly; (ii) Costa Rica, however, substantially augmented its share of machinery, electronics and

related manufacturing (sectors 7 and 8). These are confirmed by the declining shares in national exports

from 2000 to 2008, as well as the changing values of RCA. The country remains competitive in the


45

agricultural sector as well as agri‐business (sectors 1 and 2). It therefore appears to have a dual competitive

presence in sophisticated goods such as electronics and some machinery, as well as primary goods.

Figure 2A.5: Change in Costa Rica’s RCA (2000‐08)

Trade Integration

When analyzing export composition of manufactured trade, it is now increasingly important to distinguish

between trade in final goods and trade in parts and components. The expansion of global production

sharing especially in the SITC categories 7 (machinery and transport equipment) and 8 (miscellaneous

manufacturing) over the past two decades requires a much detailed analysis at the country level.

Athukorala and Menon (2010) and Athukorala (2010) extract products at the SITC 5‐digit level that are

“parts and components” and not final manufactured goods to trace an intricate pattern of trade flow

between countries. They reach a policy conclusion that trade in parts and components is less sensitive to

relative price changes; therefore, exchange rate is likely to be less effective in balance of payments

adjustment in countries that rely heavily on trade of parts and components.12

To explore the extent to which countries play a role in global production networks, trade data could be

regrouped into components and final goods, and chart the evolution of their export and import shares over

time. A look at parts and components is also important to determine if the level of sophistication of a

country’s export basket as judged by looking at final goods is illusory. In 2006‐08, according to WDI,

countries with the largest share of high‐tech goods in total manufactured exports included the Philippines,

Thailand, China, Gabon, Côte d’Ivoire, Costa Rica and Cuba alongside Singapore, United States, Ireland,

South Korea, and the Netherlands. It is clear that some of these countries contribute only to the final

assembly of high‐value intermediate inputs made elsewhere. When it is difficult to trace and assign value‐

12 Athukorala and Menon (2010) also use these disaggregated data debunk the so‐called decoupling thesis that argues that East Asia can maintain its own economic dynamism: they show that China’s reliance on import of components from other East Asian countries has grown at the same time its share of final exports of manufactured goods to this region has declined suggesting that China links East Asia to the developed markets of the US and EU through global production networks.

0 1 2 3 4 5 6 7 8

Agriculture

Chemicals, plastics, rubber

Extractive industries

Food, beverages, tobacco, wood

Iron, steel, and other metals

Machinery, electronics

Other industries

Textiles, apparel, leather

RCA_08

RCA_00


46

added to different phases of production, it is instructive to look at the share of parts and components in

exports and imports. Rising imports of parts and components indicate a country’s increased assembly

activity, whereas a rise in their export suggests its growing importance in the global supply chain. Trade in

components offers opportunities to less developed countries to specialize in niches, and not an entire

production chain. But competitiveness in this form of trade requires a mix of policy openness, low‐wages,

and good infrastructure, especially what Golub et al. (2007) term service‐links.

Figure 2A.6: Share of parts and components (%) in manufacturing exports13

Source: Computed from data in Comtrade and coding of parts and components from Athukorala (2010).

As shown in Figure 2A.6, the share of parts and components in total manufactured exports at the HS 6‐digit

level (excluding agricultural and extractive industries) for China rose from 19 percent to nearly 32 percent

between 1998 and 2008. China remains a big consumer of parts and components as it continues to have a

large role in the final assembly of goods, but it is also increasing its share of the production of intermediate

parts and components which usually have high capital content. Vietnam’s share has improved despite the

suggestion that it has been a laggard in global production sharing, unlike other East Asian countries

because of distorted FDI priorities in the 1990s.14 Its share of parts and components in non‐agricultural

goods exports more than doubled from 5 percent to almost 11 percent in a decade. India’s export of parts

and components is also rising, albeit from a lower base than China’s in 1998.

In the absence of detailed data on parts and components, one could also compute the Grubel‐Lloyd Index

(GLI) to measure the scale of intra‐industry trade. In sector i, E and M are values of exports and imports,

respectively. GLI of 1 indicates maximum intra‐industry trade and GLI of zero indicates the presence of only

13 Excludes HS chapters 1‐24, 44‐48, 25‐27, 68‐69, and 71 14 Leung (2010) singles out Vietnam as a conspicuous laggard in East Asia in terms of both assembly and manufacturing of components, and attributes the slow entry of Vietnam into the global supply chain to the protection of the state sector in the 1990s, and the orientation of FDI to joint ventures with state‐owned enterprises in heavy industries. Only after 2000, have reforms been undertaken to propel Vietnam into being a player in global production networks in light manufacturing.

19.3

9.4

5.0

31.6

13.310.8

China India Vietnam

1998

2008


47

inter‐industry trade. This topic is relevant for countries seeking to diversify exports not across industries,

but within an industry. One purpose of bilateral or regional trade agreements is to enhance

competitiveness by taking advantage of regional markets and supply chain. In this the Southeast Asian

trade bloc (ASEAN) performs a much higher share of intra‐regional intra‐industry trade than any other

trade bloc in the developing world (Brulhart 2008).

1i i

i

i ii

E MGLI

E M

Market Share


Overall market share; relative share growth

Data from Comtrade (WITS) on market shares of key importers by relevant market at disaggregated product level (6‐digit); scatterplots on Stata

A standard definition of export competitiveness, popularized by OECD, is “the degree to which, under open

market conditions, a country can produce goods and services that meet the test of foreign competition

while simultaneously maintaining and expanding domestic real income.” One way to measure this is a

country’s share in world exports over time. In 2002, China’s exports constituted 4.9 percent of world total

compared to the United States’ 10.2 percent. In 2008, China’s share had risen to 8.8 percent while that of

the United States had fallen to 7.7 percent. In absolute terms, the exports of the US did not fall but China’s

expanded rapidly. These ratios portray a country’s depth of integration in the world economy, but to know

what products constitute those trade baskets, the figures need to be disaggregated by sector.

Indeed, measuring market share by specific sectors and specific products provides a good measure of

performance of a country’s exports over time. This must be taken in context with growth, however. For

example, many countries have experienced fairly robust growth in exports in manufacturing sectors but still

show declining market share performance over the past decade, as a result of the huge growth in China’s

market share. Figure 2A.7 illustrates one way of analyzing a country’s market share performance – by

looking at relative performance against a specific competitor (in this example, analyzing Indonesia’s

market share performance versus China in the EU, for a range of manufacturing products). The graph in

Figure 2A.7 is split in four quadrants: those in the upper right indicate market share gains for both

Indonesia and China over the decade; those in the lower right indicate gains for Indonesia and losses for

China; the upper left is gains for China and losses for Indonesia; in the lower left are losses for both. As the

figure shows, the majority of products show market share gains for China and losses for Indonesia.


48

Figure 2A.7: Market share for selected manufacturing products: Indonesia v China in the EU (2000‐08)

.

Trade partners


Difference between predicted

and actual exports to

individual partners obtained

from a theory‐grounded

gravity model

Trade data from WITS; GDP‐related variables from WDI; Gravity‐related variables from CEPII; Regression run on STATA following precise technical steps as per Helpman, Melitz and Rubinstein (2008).

Trade Intensity Index

Trade Complementarities

Index

Where do a country’s exports go? How has the share of exports in particular market changed over time? A

simple analysis of change in market share of a country’s total exports by destination can reveal trends in

the country’s dynamism in its ability to re‐orient or diversify exports. In the figure below for Morocco, it can

be seen that the European Union remains the most important trading partner. The share has, however

declined from 75 to 59 percent over 8 years. Exports have been re‐oriented substantially toward higher

growth markets, like the BRICs (Brazil, Russia, India, and China) whose share grew from 6 percent to 14

percent between 2000 and 2008. Other major growth destinations have included Pakistan, Saudi Arabia,

and Mexico. The increase in the US market is modest despite the presence of a bilateral trade agreement.

For a more disaggregated analysis of where more exports “ought” to be going, e.g., destinations that are

large or rich or growing, or simply nearby, gravity models can be used. Figure 2A.9 applies a gravity model

for Senegal to ask whether it “over‐trades” or “under‐trades” with some notable export destinations. It

-40

-20

020

406

0S

ecto

ral i

mpo

rt s

hare

fro

m C

HN

, 20

00-0

8 (

% p

t)

-15 -10 -5 0 5 10Sectoral import share from IDN, 2000-08 (% pt)

Sectoral growth of EU25 import share, 2000-08 (% pt)


49

plots actual export amounts (divided by 1000, and then converted to log)15 earned in those markets

against amounts that were predicted by a regression model described in Box 2A.4. It is apparent that

Senegal under‐trades with notably large countries like the US, Brazil, China, and Germany (located above

the 45‐degree line), and has a stronger export relationship with India, Mali, Spain and Italy. Its trade with

France and Côte d’Ivoire is as predicted by the gravity model.

Figure 2A.8: Change in Morocco’s exports by destination (%), 2000‐2008

Figure 2A.9: Example of gravity model analysis of Senegal’s bilateral trade

15 Log value of 13.35, for example, is a US$ amount equivalent to exp(13.35)*1000, which is approx. US$632 million.

6.4

75.3

3.8 3.4

11.113.9

58.7

1.13.9

22.5

BRICs EU‐25 Japan USA Other

Share in 2000

USA ESPDEU

FRA

GBR ITA

JPNGBR

BRA

IND

CHN

RUSZAF

PRT

MARGMB

ARGKOR

GIN

AUS

EGY

CIV MLI

GHA

NGA

68

10

12

14

Log

of P

red

icte

d E

xpor

ts, 2

008

6 8 10 12 14Log of Actual Exports, 2008

PREDICTED v ACTUAL EXPORTSSenegal's Trading Partners


50

Box 2A.4: Gravity models

Gravity in economics is one of the field’s most successful empirical models. It was first applied by Jan Tinbergen in 1962, and draws on Isaac Newton’s formulation in physics. It asserts that two large economic clusters interact more with each other than smaller ones, and nearby clusters attract each other more than far‐off ones.16 In trade, the gravity model presumes that distance (proxying for actual shipping cost, policy barriers, and informational asymmetry) and mass (GDPs of exporting and importing countries) explain a large share of bilateral trade. One can gauge whether a country is under‐exporting to a destination country of interest by comparing actual export values in a given year with a predicted export value obtained from a regression that controls for the standard gravity variables such as absolute bilateral distance, GDP, and per capita incomes. Because two countries are likely to trade more if they share a common language, a common border, similar legal systems (possibly the same colonial power), gravity equations also include dummy variables for these shared characteristics.17 Further, gravity models ought to incorporate three recent innovations. First, as suggested by Anderson and van Wincoop (2003), “multi‐lateral resistance terms” should be incorporated in regressions because bilateral trade depends not only on absolute trade costs or distances between pairs of countries but also relative distances. Second, instead of dropping observations when there is no recorded bilateral flow, the Heckman sample selection correction method is to be used to add as one of the explanatory variables the probability of being included in the sample, i.e., having a non‐zero trade flow. When observations with non‐existent bilateral trade are dropped, as an ordinary least‐squares (OLS) method does in a log‐linearized model, the dependent variable is not really measuring bilateral trade, but one contingent on a relationship existing. Therefore this technique corrects for a potential bias in regression estimates when the probability of selection is correlated with GDP or distance. Third, following Helpman, Melitz and Rubinstein (2008), the model could control for firm heterogeneity (without using firm‐level data). This decomposes trade flows into intensive and extensive margins to take note of the fact that firms vary in terms of productivity and it is usually the more productive firms that export. This may require making assumptions about how firm productivity is distributed. With these steps, the gravity results of whether a country over‐trades or under‐trades with particular partners are better grounded on trade theory.18

When discussing bilateral or regional trading partners, another measure of interest is the Trade Intensity

Index (TII). This is similar to the RCA index introduced earlier, but it applies to export markets and not

products. It is measured as country i’s exports to country j relative to its total exports divided by the world’s

export to country j relative to total world exports. For example, in 2008, Senegal’s TII with France was 2.93,

indicating that its exports to France represent a much greater share of its total exports than the share of

the world’s export to France. In contrast, Kenya’s TII with France in 2008 was less than 0.61. This indicates

that Senegal’s export presence in an important EU member is stronger than Kenya’s. With Germany,

however, Kenya’s TII was 0.38, higher than Senegal’s 0.15.

16 See Brakman and van Bergeijk (2010) for details and recent theoretical advances on the gravity model. 17 It is also common to include a dummy variable to indicate if the two countries are members of the same preferential trade agreement. If importer and exporter fixed effects are used, we can drop country‐specific information such as GDP, GDP per capita, and remoteness. 18 Econometrically, this involves a two‐step estimation process. First, a probit estimation is run to obtain predicted probabilities. These are then used to construct controls for sample selection bias and firm heterogeneity bias. These controls are then included in the second stage regression which can be estimated parametrically or semi‐parametrically. See Helpman et al. (2008) for details.


51

ij

iij

wj

w

x

XTII x

X

To judge whether there’s a good fit between what a country exports and what a potential partner imports,

the Trade Complementarities Index (TCI) is useful. Cadot et al. (2010) describe it as a correlation between

a country’s exports to the world and another country’s imports from the world, implying that the two

countries stand to gain by trading more with each other when one has a comparative advantage in

products in which the partner has a comparative disadvantage. Algebraically, TCI is expressed as follows: ikm is product k ’s share in country i’s total imports, j

kx is product k’s share in country j’s exports to the

world. A maximum score of 100 indicates that the two countries are ideal trading partners. A lower score

indicates that the two export similar products and there may not be much scope in expanding one’s

exports to the other.

100 12

i jk k

ijk

m xTCI

TCI can be particularly useful when analyzing the potential gains from a bilateral or regional trade

agreement, as well as which countries stand to gain the most from lower trade barriers. Figure 2A.10 shows

an example of the trade complementarity indices for each ECOWAS member country as measured against

the trade basket for ECOWAS as a whole. It shows relatively low levels of complementarity overall, but

suggests that Senegal has the greatest potential to gain from ECOWAS trade, while Guinea Bissau, Guinea,

and Liberia have trade structures that are poorly aligned with the intra‐regional opportunities. From a

policy perspective, an analysis showing low complementarity may suggest a search for new partners and a

heightened role for export promotion agencies.

Figure 2A.10: Trade complementarities index for ECOWAS countries (2007)

1714

23

1215

128

48

20

10

26

34

2824

Ben

in

Burkina Faso

Cape Verde

Cote d'Ivoire

Gam

bia

Ghana

Guinea

Guinea

Bissau

Liberia

Mali

Niger

Nigeria

Senegal

Sierra Leo

ne

Togo


52

Growth Orientation


Scatter plot of import growth

by countries against a

country’s share in those

markets

Trade and growth data computed from WITS; ITC Trade Map also has data at the HS4 digit level.

Scatter plot of world growth of

products against a country’s

share in those products

One measure often used as an indicator of export competitiveness is export per capita, which tests the

degree of presence in foreign markets (Wignaraja and Taylor, 2003). Figure 2A.11 (i) gives an example of

this. However, just as income per capita is not always a good measure of human well‐being, export dollars

per capita is also not an adequate measure of export success. It matters if countries earn high export dollars

from a domestic production base that is well‐diversified and not from a narrow range of sectors, such as oil,

gas, and minerals. The former can expect a more sustainable growth pattern. As in Figure 2A.11(ii), it will be

useful to draw real exports per capita against a measure of economic diversification indicated by the

combined share of manufacturing and services in GDP. McKinsey (2010) argues that as countries develop,

they tend to meet both the objectives of earning foreign exchange to finance capital imports needed for

investment (real export per capita) and developing a diverse source of growth away from natural resources

and agriculture.

Figure 2A.11(i) and2A.11(ii): Macro analyses of export competitiveness

05

001

000

150

0

Exp

ort P

er

Cap

ita (

Co

nsta

nt 2

000

US

$)

1980 1990 2000 2010Year

BRIC: Export Per Capita 1978-2008

Russia

China

Brazil

India

In Figure 2A.11(ii), countries in the first and second quadrants have a diversified economy.19 Those in the

19 Quadrants are formed by the global median values of log of export per capita (y‐axis) and the share of


53

first and fourth quadrants earn above average export income, but in an economy that is less diversified. As

an example, both Algeria and Ukraine have comparable export earnings per person, but Algeria derives that

income from an economic base that is half the share of manufacturing and services in Ukraine’s GDP. All

Sub‐Saharan African countries (colored green), except South Africa, are in the low‐exports‐per‐capita and

less‐diversified quadrants. Generally, countries in the second and third quadrants are in transition, and the

role of public policy is to nudge them towards the first.

Openness to trade often goes hand in hand with openness to foreign direct investment (FDI). Like the

trade‐to‐GDP ratio, the outcome of openness to FDI can be assessed by looking at the ratio of the inflow of

FDI (or stock of FDI) relative to GDP. Unlike tariffs in trade, however, there is no universally accepted

summary statistic to measure policies directly related to openness of FDI. This is being redressed through

two pilot efforts at the World Bank mentioned in Box 2A.3.

Looking at how a country’s current export basket and competitiveness may shape future performance is a

critical part of the analysis of the intensive margin. Plots of export shares against the world growth rate of

products and countries can give a “portfolio” view of one’s exports – is the country exporting products that

are growing in demand in the world? Is one exporting to countries that are not only large and rich, but also

growing fast?

As the examples in Figure 2A.12(i) and (ii) show, there is a weak, positive correlation between Pakistan’s

top exports – cotton, apparel, leather, and cereals – and their rate of growth in the world market. But for

Pakistan’s exports to be “pulled” further by the world growth of products which it exports, the relationship

would ideally have to be stronger. In terms of destinations, it relies heavily on the United States and

Europe, but has not made breakthroughs in countries that are growing fast, and have the potential to be

manufacturing and services sectors in GDP (x‐axis).

UkraineAlgeria

18

20

22

24

26

28

Log

of R

eal

Exp

ort

pe

r ca

pita

, 200

6-0

8

25 50 75 100Manufacturing and Services, % of GDP in 2006-08

Exports and Growth Prospects


54

richer in the future. With the exception of China, and to a lesser extent Turkey, Pakistan’s partners are not

among those that have seen the highest rates of import growth between 2000 and 2008. Because the

richest economies of the world (US, EU, and Japan) are slow‐growing,20 countries that trade the most with

them will have a downward growth orientation for their destinations. This is likely to be the case for an

overwhelming majority of countries. This kind of analysis could, therefore, exclude rich countries and be

used to analyze a country’s relationship with emerging economies only.

Figure 2A.12(i) and (ii): Orientation of Exports

It would be important to learn what the experience of Pakistani exporters has been in trying to break into

new, fast‐growing markets. What enabled those that have been successful? To those that have not, what

factors have been the biggest hindrance? If it is search costs or lack of information, there might be a role

for export promotion; if it is policy barriers in foreign markets, there will be a role for trade agreements,

and if it is lack of competitiveness, the onus is on the domestic productivity agenda.

In terms of products, some of its most important exports like cotton and leather have not been growing as

fast as other sectors like fruits, grain, oil seeds, cereals, chemicals, cement and plastic in which Pakistan has

a decent production base. What would it take to augment the performance of some of these promising

sectors? The graphs below – created by ITC’s Trade Map – essentially confirm the previous result, but they

name countries and products and show the growth orientation for a more recent period 2004‐08.

Figure 2A.13(i) and (ii): Alternative assessment of product‐market orientation

20 The US nominal GDP is nearly US$15 trillion. Even a one percent annual growth of this economy creates economic value of around US$150 billion, which is equivalent to a 10 percent growth in a US$1.5 trillion economy (such as Spain, Brazil, or Canada). However, all else equal, a sustained growth rate of 1 percent every year doubles present income every 35 years, whereas a sustained growth rate of 10 percent doubles present income every 7 years or so. It is this power of compound growth that has transformed China after its reforms and opening up (Gaige Kaifang) process began three decades ago.

23

45

67

Log

of W

orld

Gro

wth

of P

rod

ucts

(2

000-

08)

-2 -1 0 1 2Log of Product's Share of Exports (%)

Pakistan: Orientation of Exports, 2008

44

.55

5.5

66

.5

Log

of I

mp

ort G

row

th o

f Co

untr

ies

(20

00-0

8)

-2 -1 0 1 2 3Log of Destination's Share in Exports (%)

Pakistan: Orientation of Destinations, 2008


55


56

Diversification – the extensive margin

Measures of Concentration


Share of top 3 or 5 products in

exports

Trade data from WITS. Alternatively, Trade Competitiveness Map at ITC displays pre‐computed data as does World Trade Indicators (WTI).

Share of top 3 or 5 markets in

exports

Hirschman‐Herfindahl Index

Theil’s Entropy

All else equal, a more diversified structure of production is in most cases preferable to one that relies on a

few goods, especially primary commodities. It may also be better to rely on a greater number of export

destinations than fewer. One of the first questions to answer when measuring product or market

concentration is:

a) In a given year (or over the past few years), what share of total exports has been accounted for by

the top three or five products (at a suitable level of disaggregation, such as HS 6‐digit or SITC 4‐digit

levels)?

b) What share of the country’s total exports is sold in the top three or five markets?

For example, according to the ITC’s Trade Competitiveness Map, in 2008, at the HS4 digit level, only 12.5

percent of Germany’s exports were accounted for by its top three products, whereas in Nigeria, the top

three exports accounted for 94 percent of total. In terms of markets, three top partners buy 23.3 percent of

Germany’s export, whereas for Nigeria, the share of its top three destinations is close to 60 percent.

Formally, the Hirschman‐Herfindahl (HH) Index can be used to estimate export concentration21. S is the

share of export j in the total exports of country i. A country with a perfectly diversified export portfolio will

have an index close to zero, whereas a country which exports only one export will have a value of 1 (least

diversified).

2

( )i ijj

H S

Another measure of export concentration is the Theil’s Entropy. High entropy values indicate a diversified

export portfolio. If one good is all that a country exports, the entropy is zero. If n goods have an equal

share, the maximum value is the log of n. Theil’s entropy can be computed for subgroups of exports, and

decomposed additively to measure concentration within and among groups of exports. The most

concentrated sub‐groups have the highest weights. A portfolio with high concentration of specific

subgroups of goods produces a Hirschman‐Herfindahl Index closer to 1 and an Entropy value closer to 0.

The table below calculates concentration indices for six countries in 2000 and 2008. It shows that the two

21 This index was initially developed to test the market power of firms, but has since had wider applicability.


57

measures (Hirschman and Entropy) both indicate changes in concentration in the same direction.

log( )i ij ijj

E S S

Table 2A.5: Concentration of goods at HS 2‐digit level, 2000‐2008

HH 2000

HH 2008

Concen‐tration

Entropy 2000

Entropy 2008

Concen‐tration

Chile 0.29 0.41 Increased 1.49 1.23 Increased

Costa Rica

0.25 0.19 Decreased 1.66 1.81 Decreased

Morocco 0.21 0.17 Decreased 1.77 1.86 Decreased

Senegal 0.24 0.20 Decreased 1.61 1.78 Decreased

Vietnam 0.23 0.18 Decreased 1.65 1.88 Decreased

South Africa

0.18 0.22 Increased 1.87 1.69 Increased

In manufacturing, Easterly et al. (2009) show that for every country they assessed, exports are dominated

by a few “big hits.” They find that success in exports, and specialization, is driven by a narrow range of

specific exports to specific markets. While this appears to undercut the argument for export diversification,

Imbs and Wacziarg (2003) find that economies tend to diversify over most of their development path. Only

after reaching a relatively high threshold of income is further growth associated with specialization. Klinger

and Lederman (2004) find a similar inverted U relationship between income and export activity.

Diversification is important for developing countries because it allows them to develop competence over a

broader range of manufactured goods. Countries develop by learning to make new things, and through

entrepreneurial dynamism and growth, not only relying on what they have traditionally done well.

Intensive and Extensive Margins


Hummels‐Klenow Extensive

and Intensive Margins for both

products and markets

Trade data from WITS: country exports, global imports trade‐weighted by product and by market.

Export growth can take place at the intensive margin (selling existing products to existing markets) or at the

extensive margin (selling existing products to new markets, new products to new markets, and new

products to existing markets). There are multiple definitions of the intensive and extensive margins. In this

Toolkit the concepts are invoked in the context of diversification as well as survival of exports. In the

former, the attempt is to explore to what extent countries have been able to add new products and new

markets – that are economically significant – into their portfolio. When the two margins are discussed in

the context of export survival, the attempt is to decompose export growth into constituents capturing

growth of old products in old markets versus the rest.

In the context of diversification, how has a country performed on the intensive margin (IM) and the

extensive margin (EM) of exports, say, over the past decade? Drawing on Hummels and Klenow (2005), it is


58

possible to infer, (i) how big a player a country is in what it exports (IM), and (ii) how important is what it

exports to the world (EM)? This approach improves on the method of simply counting how many new

export items have been introduced by weighing the new products by their share in world trade. So, adding

pencils to the export portfolio is not the same as adding high‐value chemicals. If Ki is the set of products

exported by country i, ikX the dollar value of i’s exports of product k to the world, and w

kX the dollar value

of world exports of product k, the intensive margin (IM) below calculates a country’s share in its

representative products. The extensive margin (EM) calculates the breadth of one’s export portfolio

relative to all exports that exist in the world.

i i

i w

i wk k

k ki iw w

k kk k

X X

IM EMX X

In Figures 2A.13 (i) and (ii), the IM and EM are plotted jointly on an IM‐EM space for Costa Rica and

Vietnam, first with respect to products and second with respect to markets. Costa Rica’s share in exports

that the rest of the world also exports (IM) has increased slightly over the last ten years, but the global

importance of export items it has a foothold in has dropped. The IM as measured here indicates how big is

Costa Rica in what it exports, and the EM measures how globally important is what it exports. This is

probably driven by its improved performance in semiconductors. Had Costa Rica not exported any

semiconducters in 1998, the extensive margin would have significantly increased. Further several

textile/apparel items, which remain a major export globally, are no longer produced in Costa Rica. In

contrast, Vietnam managed to increase its share of export in goods which the rest of the world produces

(IM) as well as the breadth of its export portfolio relative to all exportable products (EM).

Figure 2A.13 (i) and (ii): Intensive and Extensive margins

Costa Rica

Vietnam

Costa Rica

Vietnam

0.1

.2.3

.4.5

Inte

nsi

ve M

arg

in

78 84 90 96Extensive Margin

1998 2008

Intensive and Extensive Margin in Products, 1998-08

Costa Rica

Vietnam

Costa Rica

Vietnam

0.1

.2.3

.4.5

Inte

nsi

ve M

arg

in

99 99.2 99.4 99.6 99.8 100Extensive Margin

1998 2008

Intensive and Extensive Margin in Markets, 1998-08

Extending this to analyze destination markets, Costa Rican export share in countries it currently exports to

(IM) has increased, as has its reach to markets that cumulatively are larger relative to the world in 2008


59

than in 1998 (EM). In contrast, Vietnam increased its existing share of exports to existing markets, but did

not add new markets that are globally significant to its portfolio of destinations.22

Market Reach of Exports


Index of export market

penetration (IEMP)

Trade data from WITS: target country exports; sum of all country non‐zero imports of product (as described below)

Scatter plot of the value of

specific exports against the

number of markets reached

How successful are a country’s individual exports? How many markets do they reach and how much do

they earn in aggregate? In this section we review two ways of looking at the future potential for market

expansion.

One measure is the Index of Export Market Penetration (IEMP). It looks at a country’s total number of

exports, and the number of markets that each of those products reach. Then, the number of countries in

the rest of the world that import each of the products (which “our” country of interest exports) is counted.

Pairing products and countries this way, we obtain the maximum potential number of export relationships

that a country can establish given its export portfolio at present. The actual number of export relationships

is then divided by the potential number to assess how much export opportunities a country is exploiting. As

an example, Brenton and Newfarmer (2009) compare Albania’s IEMP with that of the Czech Republic. In

2004, Albania exported 955 products and the Czechs exported 2863 products (using a common level of

commodity classification). At the extreme, if Albania exported all its exports to all the countries that import

what Albania exports, it would have formed 90,350 export relationships. In reality, it only exploited 2.27

percent of the potential. In contrast, the Czech Republic exploited around 20 percent of the potential. No

country ever exports all its exports to all the countries that import them. In fact, one of the world’s most

successful exporting nations, Germany, exploits around 60 percent of its potential, and this can serve as a

best‐case benchmark.

Brenton and Newfarmer (2009) calculate the IEMP as follows, where exporter j, for whom ijI is the set of

products (i) in which positive exports are observed, 1ijkY for 1ijkX , else 0ijkY and 1ikZ for

0ikM , else 0ikZ where ijkX is the value of exports of product i from exporter j to importer k, and

ikM is the value of imports of product i by importer k.

22 These calculations are sensitive to the thresholds set for minimum export values. If any export above US$0 is included in the sample, the calculations are less informative than when a sharper cut‐off of, say, US$10,000 below which exports are defined as insignificant or equivalent to zero.


60

ij

ij

ijki I k

iik

i I k

Y

IEMPZ

Figure 2A.14 gives an example of the IEMP for several lower and lower middle income countries, including

Germany as a global benchmark. It is clear from the data that penetration of export markets by most of

these countries is far below not only that of Germany, but also China, which has substantially increased its

market penetration over the past decade..

One major limitation of this index is that unlike the Hummels‐Klenow indices explained earlier, it does not

weigh exports by their relative importance. Therefore an insignificant export to a small economy counts the

same as a major export breakthrough in a large economy. Like all the indicators discussed in this Toolkit,

this should not be used in isolation, but in conjunction with other indicators to portray a more complete

trade picture. Nonetheless, a country whose IEMP is inexplicably low could generate, for example, a

hypothesis regarding product quality or the efficacy of its export promotion agencies.

Table 2A.6: Examples of IEMP in selected LIC and LMIC versus Germany (1999 and 2008)

A second measure is the number of export destinations reached per product. Figures 2A.15 (i) and (ii)

illustrate the success of individual Russian exports. Over the eight year period, 2000‐2008, Russia expanded

the number of export markets that at least one of its products (at the HS 6‐digit level) serves from around

80 to over 100. There were 1396 products that reached at least 10 markets in both 2000 and 2008. In this

sub‐group, 975 products reached a higher number of markets than in 2000, and 348 products reached a

smaller number. The value of individual export products have also grown. The most prolific products are

Vodka and oil. The total value of Russia’s existing products (colored green) in the newly expanded or

existing markets has increased. The orange dots indicate products that were not exported in 2000 but were

in 2008, which proxy for new discoveries. The black dots are products that were exported in 2000, but not

1.4% 2.2%4.6%

4.7%

18.6%

28.3%

45.1%

2.0% 3.0%

6.7%

10.6%

26.9%

41.5%

50.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Tunisia Morocco Pakistan Vietnam India China Germany

1999 2008


61

in 2008, possibly indicating death or suspension. Some "new" exports in 2008 have already reached around

25 markets. The analysis identifies particular product stories that may be worth further analysis to

understand, for example, why a new product managed to so quickly reach a large number of countries (was

it the nature of the product? specific trade promotion efforts? etc.) or why an established product across

many countries is no longer being exported to any. These findings may be valuable at the product level but

may also be generalizeable cases for the wider export sector.

Figure 2A.15(i) and (ii): Market reach of exports

-50

51

01

5

Va

lue

of E

xpo

rts

(HS

6),

in lo

g

0 20 40 60 80

Number of Markets

Number of Export Destinations by Product 2000

-50

51

01

52

0

Va

lue

of E

xpo

rts

(HS

6),

in lo

g

0 20 40 60 80 100

Number of Markets

Number of Export Destinations by Product 2008


62

Quality and sophistication – the quality margin

Technology Content


Radar graph of the share of

high‐tech, medium‐tech, low‐

tech, primary and resource‐

based exports

Data available up to 2006 at http://info.worldbank.org/etools/prmed/; WDI also has indicators of the share of high‐tech exports in manufactured exports, together with the share of fuel or minerals/ores exports.

Although deciding which exports embody high‐level technology, or which country is engaged in the most

technology‐intensive phase of production can be controversial in an era of global production sharing, a

basic classification of final exports into broad categories of high, medium and low technology, and whether

exports are primary and resource‐based gives an indication of how a country’s export basket has

transformed over a period. In the example below, the technological content23 of Morocco’s exports is

gradually improving, but sophistication of goods exports remains relatively low. Comparing figures across a

decade from 1996 to 2006, Morocco’s exports exhibited some diversification away from agriculture and

fertilizers to manufacturing with moderate technological content. Apparel was such a new industry, as well

as trade in parts and components related to automobiles. In terms of share of high‐tech products in its

overall exports basket, Morocco’s ratio is under 10 percent, but this marks a significant improvement from

a decade earlier.

Figure 2A.16: Technological Content of Morocco’s Exports

23 Classified by the World Bank’s Poverty Reduction and Economic Management (PREM) Network using data from Comtrade. Data available at http://info.worldbank.org/etools/prmed/. High‐technology exports generally include products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery.


63

Unit Values


Cross‐country comparison of

unit values and quality at the

SITC 5 or HS 6 digit level

Unit values computed from trade data in WITS (PRMTR database developed

for EU imports based on COMEXT database from EUROSTAT); Quality

measured by unit prices relative to 90th percentile of the unit value

distribution across countries exporting the product to the market Quality ladders

Co‐mapping of quality and

market share performance

Goods in the same product category vary widely in quality, proxied by unit values (nominal sales divided by

quantity). When supply is competitive, higher prices are generally associated with higher quality and

greater product differentiation.24 One way to increase the absolute amount of export per capita is to

increase the value of export per unit. Hwang (2007) finds strong evidence of convergence in product

quality: when countries introduce a new product, they are usually low in quality, but their unit prices tend

to converge to the global frontier at a rate of about 5 percent per year. This convergence is unconditional.

The variance in the unit price of goods signals opportunities for countries to upgrade quality, and grow

faster. Because upgrading of quality is potentially a secure avenue to boost growth, it is imperative to

assess not only what a country produces, but what the quality of exports looks like.

Table 2A.7 gives an example of how unit values of seemingly similar products (at the SITC 5‐digit level)

differ.25 It has unit values of imports into the United States in 2008 of selected goods from a range of

developing countries, as well as Germany. Some products command an identical unit price (e.g.,

dry/crushed capsicum) suggesting that prices are dictated internationally and there is little room for within‐

product upgrading. Unit values of some goods vary marginally (e.g., basketwork, printing press parts,

cutting blades for machines) whereas those of others vary widely (e.g., frozen tuna, locks and keys, motor

car bodies).

Hwang (2007) suggests that because convergence of unit values occurs unconditionally, low‐income

countries need to produce goods within a category where the global frontier of productivity is high and is

possibly dominated by rich countries. Learning and catch‐up is highest in those categories. If a country’s

portfolio consists of a small share of differentiated goods where upgrading possibilities are limited, the

need for diversification becomes more urgent.

24 There are caveats, as explained in Racine (2010): when (mirror) export values are measured inclusive of cost, insurance and freight, larger distances introduce larger biases. Products like oil whose prices are set internationally have a weaker association between unit values and quality. High unit values could reflect high costs or market power in specific locations. They may also vary with the processing stage of production, with downstream industries typically having higher unit values than upstream. 25 Rauch (1999) classified commodities into: (i) those traded in organized exchanges (homogenous products), (ii) those with reference prices (where the brand of producers is not important), and (iii) differentiated products. Special links between countries (common language and colonial ties) are found to be more important for trade in differentiated products because they lower search and matching costs between sellers and buyers.


64

Table 4.7: Examples of Unit Values (US$) of Exports to the United States, 2008

SITC 5 Product China India Costa Rica Senegal Vietnam Pakistan Germany

07513 Capsicum dry and crushed 3.070 3.070 3.070 3.070 3.070 3.070

89971 Basketwork, wickerwork, etc. 4.698 4.736 4.868 4.468 4.570 4.852 4.716

72699 Printing press parts 57.020 57.020 57.025 57.016 57.044 57.020

69561 Cutting blades for machines 12.304 12.049 10.816 12.898 12.901 13.747

69911 Locks/keys/clasps/parts 9.227 18.305 133.196 5.846 42.371 26.477

03414 Tuna/skipjack/bonito f/c 14.686 10.310 6.242 13.342

78421 Motor car bodies 495.27 170.997 123.23 10522.75

Source: Computed using mirror data in Comtrade

Figure 2A.17: Decomposition of export growth across key products: 2002‐2007

Decomposing exports into value and volume contributions can tell an important story about

competitiveness. For example, Figure 2A.17 illustrates that in Mongolia, the rapid growth in minerals

exports in recent years is explained almost fully by rising world prices, a factor over which the country has

little control. By contrast in many other key products like meat and cashmere garments, where prices are

more dependent on producer competitiveness, Mongolia has experienced substantial declines in the unit

value of production, suggesting poor quality competitiveness.

Analyzing data on unit prices of important export products against key competitors can provide a valuable

assessment of the trends in a country’s quality competitiveness. We rely on the COMEXT database from

EUROSTAT to characterize the relative unit values of imports in each EU member country. As in Schott

(2004), unit values were calculated simply as the quotient of general imports values and quantities. Within

any product (8‐digit Combined Nomenclature code) for any given year, we then have a distribution of unit

values of imports from the different source countries. For each good and exporting country , in time year

, we generate a measure of relative quality as:

‐12%

30%

1%

‐3%

42%

15%

25%23%

30%

‐4%

2%

‐1%

‐29%

6%

‐22%

1%

39%

16%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

Meat Cashmere‐dehaired

Cashmere garments

Textiles Copper concentrate

Gold

export value units value/unit

Share of exports

0.6%Share of exports

0.6% 5.9% 0.7% 1.5% 41.6% 12.0%


65

Where denotes de unit value of the good and denotes the value at the 90th percentile of the unit

value distribution across countries for that product. denotes the relative quality of the country’s export

of that good, i.e., quality relative to other countries exporting the same good. Figure 2A.18, for example,

shows price per unit trends for Indonesia’s top 5 garment export products to Europe, against its main

competitors. In this case, it highlights the fact that Indonesia might be getting caught in the middle in terms

of competition in garment export markets – it struggles to compete on price with low cost producers like

China and Bangladesh but it is not yet able to reach the quality levels of Thailand and Malaysia.

Figure 2A.18: Analysis of Indonesia’s unit price trends for top 5 garment exports to EU relative to main competitor (1988‐2008)

Using data on unit prices it is also possible to develop analyses of quality ladders, measuring the relative

quality of a country’s exports against all other countries that export a specific product (worldwide or to a

specific market). As illustrated in Figure 2A.19, the plot of all countries based on their rank in quality and

their relative pricing creates a “ladder” or a long tail. Figure 2A.18 highlights the declining quality

performance of Macedonia in one of its most important export products – between 1998 and 2008, the

quality of its exports declined and it was overtaken in quality by countries like Sri Lanka and Russia.

The next step in the analysis is to look at the relation between changes in the relative quality measure and

changes in market shares – it is one thing to increase quality but if it comes at the expense of market share,

it may be a trade‐off not worth having. Similarly, improving share in the context of declining quality may

actually represent increase cost competitiveness rather than a decline in quality per se. Figure 2A.20 plots

these results for three products (defined by an 8‐digit Combined Nomenclature code) for Senegal in the EU.

The x‐axis shows the growth rate of market share (log difference of market shares) between 1996‐08 and

2006‐08. The y‐axis represents the growth rate of the average quality measure between the same periods

of time. The size of each bubble is the importance of each product in Senegal’s export basket.

‐

5.0

10.0

15.0

20.0

25.0

1988 1993 1998 2003 2008

Comparison of average unit values of IDN top 5 exports to EU: 1988‐2008

BD

CN

ID

MY

TH

VN


66

Figure 2A.19: Quality ladder for women’s cotton blouses and shirts import to EU (1998 and 2008)

Figure 2A.20. Change in Senegal’s market shares and relative quality in the food, textiles and clothing and footwear products in the EU

-1.5

-1-.

50

.5L

og d

iff in

re

lativ

e qu

ality

-6 -4 -2 0 2Log diff market shares

Changes in Market Shares and relative Quality (Ave.06-08/Av.96-98)16-24 Food Products

preserved tuna, skipjack and bonito (HS=160414)

Cane Molasses (HS=170310)

Oil‐cake, Solid Residues Resulting from Extraction of Ground‐nut Oil(HS=230500)

-2-1

01

23

Log

diff

in r

ela

tive

qual

ity

-4 -2 0 2Log diff market shares

Changes in Market Shares and relative Quality (Ave.06-08/Av.96-98)50-63 Textiles and Clothing

Cotton (Not Carded or Combed)(HS=520100)

-2-1

01

Log

diff

in r

ela

tive

qual

ity

-8 -6 -4 -2 0Log diff market shares

Changes in Market Shares and relative Quality (Ave.06-08/Av.96-98)64-67 Footwear

Partial Wigs, False Beards, False Eyebrows, of Synthetic Textile Material(HS=670419)

Wigs, False Beards, Eyebrow, of Animal Hair or Other Textile Materials(HS=670490)

M

U

L

P

R

M

U

L

P

R

0

.

1

1.

0 2 4 6 0 2 4 6

199 200

Quality

indeGraphs by

Figure 10. Women's blouses, shirts and shirt-blouses of cotton (excl. knitted or crocheted and vests)


67

Sophistication


PRODY AND EXPY Data obtained from Comtrade (WITS); PRODY and EXPY calculation plotted

against GDP per capita.

The foundational trade models like Hecksher‐Ohlin or Ricardo attribute trade to differences in factor

endowments or technology across countries. Seldom has growth of countries been explicitly analyzed from

the perspective of actual goods produced. Instead of pre‐determining the classification of products (e.g.,

technology‐intensive or not), Hausmann, Hwang and Rodrik (2006) estimate the sophistication of products

based on the income levels of countries that produce them. If a product, say, internal combustion engine is

largely produced by rich countries, that product would be revealed to be “rich” and sophisticated. This

outcome‐based measure of sophistication for each product, called PRODY, is a weighted average of the per

capita GDP of countries producing that good, with weights derived from revealed comparative advantage.

Similarly, PRODY of coffee beans would be much lower because the countries that dominate its production

are generally low‐income.

jk

j ikk j i k

jkj k i

j j

x

X xPRODY Y and EXPY PRODY

x XX

PRODY values of all products that a country exports are then weighted by the product’s share in the

country’s total export basket and summed to derive a country’s level of GDP per capita as inferred from the

sophistication of its export basket. Called EXPY, this measures the income content of a country’s export

basket. It is regarded as a more inclusive measure of sophistication than intensity in technology or R&D. It

captures the wages supported by production of a good. Hausmann et al. (2006) show that countries with

high EXPY tend to have higher growth rates in the future. Countries “become” what they export by

converging to the income level implied by their export baskets.

For each country in Figure 2A.21, one can ask if the products it is currently exporting are more

sophisticated than would be suggested by its level of income. This can then inform an agenda aimed at

gauging the urgency with which it ought to be promoting or discovering new export activities. According to

Klinger (2010), for incumbent products many of the conventional competitiveness variables matter (the

broadest set is the 12 pillars covered by the World Economic Forum’s Global Competitiveness Report). For

“new products” however, they may not be sufficient, as countries need to deal with distinct market failures

related to informational externality and coordination problems. Based on the measure of export

sophistication (EXPY), countries like China, India, Indonesia, Philippines and Thailand are above the line

implying that their export basket is “richer” than they are. Developing new products is much more

important for countries below the line, such as resource‐rich countries like Qatar and Russia. Countries

above the line can expect to see growth from existing exports.


68

Figure 2A.21: The relationship between income and export sophistication

Box 2A.5: The drawbacks of PRODY and EXPY

The concepts of PRODY and EXPY are, however, not free of criticism. PRODY of some products are counter‐intuitively high suggesting sophistication in products merely because rich countries produce them: bacon and ham, for example, have a higher PRODY than internal combustion engines. Further, the quality of products varies (even if they all have an identical code at the HS 6‐digit level) – cars from Country X may not be the same quality as cars from Country Y. When product quality is not taken into account, EXPY overestimates the importance of sophisticated products from low‐income countries. Xu (2006) shows that once products at the HS 6–digit level are further divided by relative unit values, the structure of China’s exports is consistent with its level of development. This has led authors like Maloney and Lederman (2010) to point out that how a country produces an export matters more than what it produces. Seemingly high‐tech products like computers can be produced in low‐tech ways, and vice‐versa. Furthermore, because of fragmentation of production, while the final export of a sophisticated product might be from a low‐income country, its contribution might have just been in the final assembly of high‐value intermediate inputs made elsewhere. One should not, therefore, lose sight of the entire value chain and explore which stage of production creates and captures the greatest value. Even if computers are deemed not to be sophisticated because the final assembled package is exported from a low‐income country, the innards could be highly skill‐intensive possibly imported from richer countries. According to Dean, Fung, and Wang (2007), imported inputs accounted for 57 percent of Chinese computer exports in 2002. Koopman et al. (2008) estimate the foreign content in China’s exports to be about 50 percent overall, and 80 percent in sophisticated products like electronic devices. In the well‐known example of the iPod, an overwhelming share of the final assembled value of an iPod exported from China is captured by the creators of intellectual property, and not in the form of wages earned by the assemblers. Krugman (2008) discusses this issue in the context of a paradox that increased trade of the United States with developing countries appears to be in skill‐intensive products, contrary to trade theory. Much of this is due to aggregation bias, where only the labor‐intensive final stages of production could be from developing countries, yet give the illusory impression that the entire production of the finished good occurred within the borders of that country. To the extent possible, total exports net of components imports could reveal a country’s place in

SGP

MYS

BRN

ARE

TUN

QAT

NPL

LKA

BGD

NPL

CHNTHA

VNM

IND

PHL USA

CHEDEU

BRA

RUS

ZAF7

7.5

88

.59

9.5

Log

of E

XP

Y

6 7 8 9 10 11Log of GDP Per Capita (PPP, 2003-05)

Export Sophistication 2003-05


69

global production sharing. For example, in 2006/07, nearly 75 percent of components imported for machinery and transport equipment (SITC 7) by China were from the rest of East Asia (Athukorala and Menon, 2010).

As with most of the measures used in this analysis, measuring EXPY or another indicator of sophistication

over time can give an important indication of the relative growth in sophistication of the export basket and

the degree to which this is impacting growth of per capita income. As Figure 2A.22 (i) shows, over the past

two decades, sophistication of China’s export basket has increased every biennium (each dot represents

two years), and this has been associated with rising per capita income. India’s exports are also becoming

more sophisticated, but not as fast as China’s. Vietnam resembles the trajectory of India. Starting from a

very low base around the time it began its reforms under Doi Moi in the late 1980s, it has since caught up

with many low‐income countries like Pakistan whose export sophistication hasn’t undergone as stark an

improvement as its Asian peers. From this graph alone, we cannot say if rising export sophistication pulled

up per capita incomes, or countries moved into production of more sophisticated exports after average

incomes rose. However, Hausmann and Klinger (2007) have shown for a large pool of countries that export

sophistication at present is a good predictor of economic growth in the future. Felipe (2010) estimates that

a 10 percent increase in EXPY at the beginning of period raises growth by about half a percentage point.

Figure 2A.20 (ii) provides an additional explanatory element by adding dates to each dot on the graph – this

helps us see more clearly the consistent trajectory of China (upward) and Russia (downward) and the more

ambiguous picture in Brazil.

Figure 2A.22: Evolution of export sophistication: (i) Pakistan v peers; (ii) BRICs

Revealed Factor Intensity (RFI)


RPCI and RHCI Indices available from UNCTAD

(http://r0.unctad.org/ditc/tab/index.shtm) and PRMTR database

If PRODY and EXPY reflect the income content of exports, the revealed factor intensities of traded goods

reflect the human and physical capital content of exports. They are computed in a similar manner to

PRODY, but are argued to have a stronger theoretical linkage to comparative advantage derived from factor

400

08

000

120

00

EX

PY

PP

P (

Co

nsta

nt 2

00

0 U

S$

)

100 800 1500Real GDP per capita (constant 2000 US$)

China

IndiaVietnamPakistan

1988-2006Change in Export Sophistication


70

endowments. Goods that are predominantly exported by countries rich in human capital and physical

capital are revealed to be intensive in human capital and physical capital, respectively. The indices are

computed by weighting the factor endowments of all countries exporting a particular product; weights are

derived from a modified version of the revealed comparative advantage. Human capital is estimated by the

average years of schooling, and physical capital stock is estimated by the perpetual inventory method

which reconstructs capital stock estimates from investment flows by recursively adding up current

investments to previous period’s capital stock with appropriate depreciation. The database of factor

intensities (human, physical, land, and natural resources) of all products at the SITC 4‐digit and HS 6‐digit

level are made available by UNCTAD.26

* *

jk jk

j jjk k j

jk jkj jj

j jj j

x x

X XKRPCI and RHCI H

x xLX X

Figure 2A.23(i)‐(iv): Revealed capital intensity

26 Cadot et al. (2009) describe the methodology of the computation of the indices; database available at http://r0.unctad.org/ditc/tab/index.shtm.

02

46

81

01

2

Rev

eal

ed H

um

an C

apita

l In

dex

200

3

0 50000 100000 150000Revealed Physical Cap. Index 2003

REVEALED CAPITAL INTENSITY INDICES AND EXPORT VALUEPAKISTAN 2003

02

46

81

01

2

Rev

eal

ed H

um

an C

apita

l In

dex

200

3

0 50000 100000 150000 200000Revealed Physical Cap. Index 2003

REVEALED CAPITAL INTENSITY INDICES AND EXPORT VALUEKOREA 2003

24

68

10

12

Rev

eal

ed H

um

an C

apita

l In

dex

200

3

0 5 10 15Log of Export Value by Product (HS6) 2003

REVEALED HUMAN CAPITAL INTENSITY INDEXQATAR 2003

24

68

10

12

Rev

eal

ed H

um

an C

apita

l In

dex

200

3

0 5 10 15 20Log of Export Value by Product (HS6) 2003

REVEALED HUMAN CAPITAL INTENSITY INDEXSINGAPORE 2003


71

Figures 2A.23(i) and (ii) plot the physical and human capital content of exports on the same graph for

Pakistan and the Republic of Korea, with dots weighted by export value in 2003. The quadrants are formed

by the median human and physical capital contents of each country’s exports that year. The Korean space

appears more dense, indicating that it exports many more goods (at the HS 6‐digit level) than Pakistan.

Most notable, however, is the fact that some of the biggest earning Pakistani exports (indicated by bubble

size) embody human and physical capital content that is below the median of its portfolio. In contrast,

Korea’s big export earners embody capital content that is above the median of its overall export portfolio.

Pakistan’s most important exports in terms of value are those that need little machines, capital equipment,

and schooling. Its exports that are capital intensive are yet to be scaled up.

The next two figures compare only the revealed human capital intensity of the exports of Qatar and

Singapore. The quadrants in both graphs are formed by the median of Qatar’s export earnings and human

capital content of its exports in 2003. Singapore produces 20 times more number of goods (it has a much

bigger native population than Qatar’s, but the workforce is not more than five times larger). The human

capital content of a large share of those exports are higher than the median content of human capital of

Qatar’s exports. Despite the large number of goods, the human capital content of the median export is

almost identical (Singapore’s 7.7 to Qatar’s 7.8). The human capital content and economies of scale of

existing exports have implications for the human resources policies of Qatar if it seeks to diversify away

from its reliance on natural resource based exports into knowledge‐based industries and trade in services.

Upgrading: Analyzing Product Space


Proximity between products

and product densities

Tools like Product Space Explorer and Product Space Parser downloadable

from www.chidalgo.com; Cytoscape (open source bioinformatics software)

downloadable from www.cytoscape.com; RCA data to be computed from

WITS.

When structural transformation or economic growth is studied as being determined by broad aggregates,

such as human and physical capital, there is a risk of under‐appreciating the complexity of sector‐specific

ingredients needed for economies to adapt, experiment, and evolve. Hausmann and Klinger (2007) argue

that every product requires capabilities that are specific to that activity, from labor‐training and physical

assets to regulatory requirements, property rights, and infrastructure. Exporting mangoes requires

different capabilities (such as a decent sanitary and phytosanitary regime) than producing synthetic

apparel, but the capabilities for producing mangoes are likely to be similar to exporting vegetables.

Similarly, gold mining or even extraction of forest products may require a higher level of property rights

enforced than, say, assembly of electronic parts. The ease with which an economy can move to producing

new exports depends on what its installed capability looks like already. The hypothesis is that countries

that build up competence in producing a certain good can redeploy their human, physical and institutional

capital more easily if they seek to produce goods that are “nearby” those that they are producing already.


72

Proximity between products on a product space is computed from the pair‐wise likelihood that a country

exports a product given that it also exports another product.27 Proximity between any two goods (m and n)

is the minimum of the pair‐wise conditional probabilities of having comparative advantage.

, min ,m nm n

n m

RCA RCAP PRCA RCA

In the product space map presented later, the south‐east part of the map has a lot of products that are

clustered together, particularly related to industries such as chemicals, machinery and metals. Products

that are peripheral are petroleum, agriculture, cereals and labor‐intensive. Whether a country’s exports in

which it has comparative advantage are located in the denser part of the product space or in the periphery

can predict the ease with which that country transforms itself economically. Structural transformations are

not smooth movements along a continuum but a messy process beset by market failures. When such

market failures are binding, it is harder for firms to hop longer distances without government coordination

and support. Because products do not evolve in sequence, i.e., having iron ore deposits does not

necessarily make a country an efficient steel producer, lateral‐linkages are as or more important than

forward‐linkages with downstream industries.

Using the tools pioneered by Hidalgo et al. (2007), the product space maps indicate all tradable products at

the SITC 4‐digit level. The black dots are those with revealed comparative advantage. Other colors indicate

the category of goods they belong to such as resource‐based, raw materials, labor and capital intensive

manufactures, etc. In their analogy, the product/dots are trees that group themselves to form dense and

sparse parts of a forest. Location of firms in the denser parts of the forest creates more opportunities for

diversification and technological upgrading because market failures are less binding when firms have to

make smaller adjustments to move to produce “nearby” goods requiring similar capacities.

The center of the product‐space, for example, is quite dense with better connectedness among industries

related to metallurgy, vehicles, and machinery. To the bottom right of the product‐space lie the more

sophisticated electronics and chemical industries. The scattered industries on the upper half are largely

agricultural and resource‐based. Countries that succeed in transforming themselves over time from

producing unprocessed natural or agricultural goods and labor‐intensive manufactures (such as footwear

and garments) to more sophisticated manufactured products like machinery and chemicals tend to see

higher rates of economic growth. Over the past forty years, countries like Korea, Indonesia, Turkey,

Malaysia, Thailand, Singapore and China have undergone the most dramatic transformation and seen some

of the fastest rates of economic growth.

In Figures 2A.24(i) and (ii), the product space maps for Pakistan are shown. The cluster on the top where

Pakistan had several products in both years with RCA (greater than 1) represents garments. It has also

27 The minimum of the two probabilities is taken to avoid the problem that originates when the number of exporters of a product falls. If good A is produced only by one country, the conditional probability of all other products being produced given that A is produced by that country is 1, reflecting the uniqueness of the country, not the similarity between goods. The reverse probability is not the same. See Hausmann and Klinger (2007) for methodological details.


73

performed well in textiles, which incidentally is closer to industries that are more capital‐intensive and

generally produced by rich countries. Between 1993 and 2008, while Pakistan has increased the number of

agricultural and labor‐intensive products that it had comparative advantage in, it has not had a major

breakthrough in more sophisticated products.

Figure 2A.24(i) and (ii): Product space maps of Pakistan (1993‐ left and 2008‐ right)

Figures below classify Pakistan’s exports (valued above US$10,000) into four categories. The first is a group

of products that Pakistan has consistently been competitive in. There were 103 products with an RCA

greater than 1 in both 1993 and 2008. These are mainly textiles and garment items such as linen, cotton,

curtains, carpets, men’s coats, and leather clothing. Figure 2A.25(i) shows some of the top products from

this category with at least 0.5 percent share in Pakistan’s total exports in 2008. On the product space map,

the textile cluster comes closest to the denser, high‐value manufacturing industries. There is no Pakistani

export (with RCA >1) firmly embedded in this part of the product space.

There were 38 major products that did not have an RCA greater than 1 in 1993, but did in 2008. Figure

2A.25(ii) shows some of these “emerging” products with at least 0.2 percent share of national exports in

2008.28 This includes potentially high‐value exports like beddings and mattresses, frozen fish, jewelry,

cement and metal waste. The shipping‐dependent heavier products are likely to be more competitive in

regional markets.

The third category is of “marginal” products that Pakistan exported both in 1993 and 2008, but with an RCA

of less than 1. There were more than 400 of such marginal exports. Figure 2A.21(iii) illustrates a few of

these with national export share in 2008 of at least 0.05 percent. With external facilitation, some of these

products could be upgraded and made more competitive. They include vacuum pumps, chemicals (acids),

wheeled tractors, telecom parts, food processing machines. These products indicate that Pakistan has

28 Note that the product space maps consist of 775 products, whereas medium to large sized countries typically export more than this number. Several products that Pakistan exports cannot be mapped on the product space.


74

installed capacity to move readily into fairly sophisticated manufacturing industries. Why it has not

succeeded in becoming a major player in any of these products would be one major point of policy enquiry.

The fourth category includes goods that were competitive in 1993 but no longer in 2008. There were over

20 major products in that category. In Figure 2A.23(iv), three of them which had an export share of at least

0.05 percent in 1993 are illustrated. They include textile and garment products that were no longer able to

withstand competition from countries producing similar items.

Figure 2A.25 (i): Pakistan’s competitive products, 1993‐2008

Acyclic alcohol

Goat leather

Bed, table linen

Made‐up textile arts

Molasses

Hosiery

Woven cotton

Knotted carpets

Leather clothing

Brown rice

Base metal ore

Bovine leather

Men’s knit coat

Figure 2A.25 (ii): Pakistan’s emerging products, 1993‐2008

Frozen fish

Cement

Refined copper

Mattresses and bedding

Metal waste

Waste slag

Jewellery


75

Figure 2A.25 (iii): Pakistan’s marginal products, 1993‐2008

Plastic boxes

Beverages

Vacuum pumps Tractors

Vacuum pumps

Nucleic acids

Polycarboxylic acid

Food processing machines

Telecom parts

Figure 2A.25(iv): Pakistan’s declining products, 1993‐2008

Women woven coat

Artificial filament/yarn

Synthetic filament


76

Entry and survival – the sustainability margin

Structure of the Export Sector


Number and nature of firms

participating in trade

Data from Enterprise, Manufacturing or Industrial Census (country‐specific),

or from Customs Transactions Database

One important determinant of trade performance and sustainability is the structure of the trade sector

itself – specifically, understanding the degree to which a significant share of firms are participating in trade,

the average and distribution of size of exporters, and the role of FDI in the export sector. Analyzing this

requires substantial firm‐level data which is not likely to be available to the analyst in every country.

Normally, it will rely on access to census data – e.g. from a manufacturing, industrial, or establishment

census. Figure 2A.24 (i) shows that the apparel and furniture sectors in Indonesia are bifurcated – while

most firms do not export, those that do export the large majority of their production. Figure 2A.26 (ii)

highlights the dramatic difference between domestic and FDI exporters in these sectors, with FDI firms

producing and exporting 15‐20 times (on average) that of domestic exporters.

Figure 2A.26 (i) and (ii) Characteristics of exporting firms in selected Indonesian manufacturing sectors

Longevity of Export Episodes


Kaplan‐Meier survival

function; Nelson‐Aalen

cumulative hazard function;

extended mean graphs

Trade data from WITS; Regression run in STATA using commands designed

for survival analysis

Attempts by developing countries to introduce new exports in new or incumbent markets are fraught with

challenges. Exploring why countries succeed in penetrating foreign markets but fail to sustain those flows

80%86%

48%

82%90%

18%

0%

20%

40%

60%

80%

100%

Apparel Furniture Automotive

Export share of production for exporting firms ‐ 2004

Domestic Foreign

23,802 2,327

304,839

41,943

‐

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Apparel Furniture

Export value for exporting firms ‐ 2004

Domestic Foreign


77

can help explain the varying export performance across countries. Empirical exercises with firm level data

could shed light on whether firm characteristics such as age, size and type of ownership can influence

export longevity. At a more aggregate level, Brenton et al. (2009) find that the size of initial export flow

explains subsequent duration of flows, as do search and information costs and exchange rate volatility.

In Figures 2A.27(i) and (ii), the survival rates of Qatari and Singaporean exports at the SITC 4‐digit level are

assessed for the 10‐year period 1999‐2008. Qatar has 9387 country‐product pairs (excluding petroleum and

gas). For many of these pairs, trade takes place just once, or a single spurt of consecutive years. Some die

and are then revived. So, the total number of export spells is 22534. The median duration of the export

spell is only 1 year, and the mean duration is 2.3 years.

Figure 2A.27(i) and (ii): 10‐year export survival plots

The first graph (Kaplan‐Meier survival function) shows that the probability of a Qatari export relationship

surviving till the second year is less than 0.5, and maintaining a relationship for more than 2 years is less

than 0.25. In comparison, the survival rate of Singapore’s export relationships is much higher. It has 76429

export relationships. The probability of a Singaporean export relationship surviving beyond Year 1 is 0.7.

Singaporean exports also have a much higher probability of survival in countries with which it shares a

border (namely Malaysia, indicated by the red line). This is marginally true for Qatar’s exports to countries

with which it shares a border (Saudi Arabia and the UAE), but the increased chance of survival is not as

stark as for Singapore.29 Geographical location is not a trade policy variable, but for almost all countries,

proximity matters, highlighting the importance of logistics, business organization, and infrastructure that

reduce trading time and cost.

29 According to the log rank test, the difference in survival rates to countries it shares a border with and does not is statistically insignificant.

0.00

0.25

0.50

0.75

1.00

0 5 10analysis time

contig = 0 contig = 1

Survival of Qatar's Non-gas Relationships 1999-2008

0.0

00

.25

0.5

00

.75

1.0

0

0 5 10analysis time

contig = 0 contig = 1

Survival of Singapore's Export Relationships 1999-2008


78

Decomposition of Export Growth and Death


Growth and survival rates of

export relationships;

breakdown of the intensive

and extensive margins into

their constituents

Trade data from WITS; computations in either Excel or Stata.

This section complements the earlier discussion on the intensive and extensive margins by looking at

export relationships at the level of country‐product pairs. This has the advantage of exposing better the

relationships along the intensive margin (existing exports to existing markets) and extensive margin (new

exports to existing markets, new exports to new markets, and existing exports to new markets). This can

also reveal the scale of decline and death of major exports in specific markets.

Old

market

New

market

Old

product

Intensive

Margin

Extensive

Margin

New

product

Extensive

Margin

Extensive

Margin

For mature exporters, growth generally occurs at the intensive margin. The share of export growth

contributed by existing flows to existing markets is usually dominant. This can be tempered by the

extinction of products or decline in export value of existing products in existing markets. On the extensive

margin, expansion of existing products to new markets is more commonplace.30 In Figures 2A.28(i) and (ii),

export growth is decomposed for India and Senegal between 2001 and 2008. In India, existing flows to

existing countries accounted for nearly 100 percent of the growth, but was offset by exports that fell to

existing markets (‐5.8 percent). A modest 6 percent of export growth was explained by existing products to

new markets. While the categories can be sensitive to the thresholds and cut‐offs used, overall, in poorer

countries, growth on the extensive margin can play a bigger role as can the decline and extinction of

existing flows (low survival rates). This is illustrated by the decomposition of export growth for Senegal

which saw a bigger percentage increase in exports of existing products into existing markets (110 percent)

as well as a bigger percentage decline in the same category (42 percent). Growth on the extensive margin

(both of new products to new makets and of old products to new markets) was much higher for Senegal

than India.31

30 Brenton and Newfarmer (2009) find in their study of 99 developing countries that the increase in exports of existing products to existing markets accounted for 105 percent of total export growth between 1995 and 2005. 31 This analysis for the period 2001 to 2008 assumed the following: i) products that were exported to at least one country either in 2001 or 2002 were classified as existing products; those not exported anywhere in 2001 and 2002 were new products, ii) markets that were reached with any product in either 2001 or 2002 or 2003 were classified as existing markets, the rest were new markets. Products that were not exported to any country in 2007 and 2008 were deemed “dead.” Alternative time periods should be considered to check for robustness.


79

Figure 2A.28(i): Decomposition of Export Growth for India, 2001‐08

Figure 2A.28(ii): Decomposition of Export Growth for Senegal, 2001‐08

Going further, one can analyze if there is a pattern in the death of exports. Are exports becoming extinct

more frequently in particular markets? Do declining exports belong disproportionately to a particular

industry cluster like animal products or labor‐intensive industries? In the Senegal example, there were 305

export relationships (out of 9720 country‐product pairs) that had at least one non‐zero value between 2001

99.74%

‐5.78% ‐0.11% 0.00% 0.00%6.00%

Increase of old products in old

markets

Fall of old products in old

markets

Extinct Increase of new products

in new markets

Increase of new products in old markets

Increase of old products in new markets

Extensive Margin

Intensive Margin

109.4%

‐42.1% ‐3.5% 8.2%0.9%

27.1%

Increase of old products in old

markets

Fall of old products in old

markets

Extinct Increase of new products in new markets

Increase of new products in old markets

Increase of old products in new markets

Intensive MarginExtensive Margin


80

to 2006, but a zero export value in both 2007 and 2008. In terms of markets, the maximum number as well

as cumulative value (from 2001 to 2006) of export relationships that became “dead” were destined mainly

to neighboring countries like Mali, Guinea‐Bissau, The Gambia, Guinea, and Sierra Leone. The three notable

non‐African markets were France, The Netherlands and India. In terms of products, the dominant industry

groups to which dead exports belonged were petroleum and cereals. For India, during the same period, the

major markets where its exports disappeared were Japan, Oman, Syria and Indonesia. As for products, the

main ones that disappeared in 2007 and 2008 were all related to petroleum (motor spirit/light oil).

Table 2A.11(i): Destinations of Declining Exports of Senegal

Code Country Region Cumulative Value (US$ ‘000), 2001‐06

Number ofRelationships

MLI Mali Sub‐Saharan Africa 92257.22 23

GMB Gambia, The Sub‐Saharan Africa 19066.48 21

GNB Guinea‐Bissau Sub‐Saharan Africa 16763.77 18

GIN Guinea Sub‐Saharan Africa 9875.056 15

FRA France Western Europe 9137.018 38

NLD Netherlands Western Europe 8309.968 5

LBR Liberia Sub‐Saharan Africa 5780.042 2

SLE Sierra Leone Sub‐Saharan Africa 4930.695 5

TGO Togo Sub‐Saharan Africa 4795.08 5

IND India South Asia 4385.075 3

CPV Cape Verde Sub‐Saharan Africa 4353.5 5

Table 2A.11(ii): Declining Exports of Senegal

SITC Product Name Industry Cumulative Value (US$ ‘000), 2001‐06

Number ofRelationships

3330 Petrol./bitum. oil, crude Petroleum 246743.1 15

3342 Kerosene/medium oils Petroleum 111474.7 14

2634 Cotton, carded/combed Cereals 45199.64 25

3345 Lubs (high petr cont) etc Petroleum 9076.579 20

3341 Motor spirit/light oils Petroleum 8912.64 7

3344 Fuel oils, nes Petroleum 4197.056 3

812 Fodder bran/by‐products Cereals 2395.269 2

422 Rice husked (brown) Cereals 2328.815 3

2633 Cotton waste Cereals 2141.985 8

A related anlaysis is a more explicit accounting of export relationships by product and country. In the table

below for the period 2004‐08: (i) German exports are the most versatile with the maximum number of

goods reaching the most number of countries, covering half of all relationships that can exist; (ii) India

exported three times more than Vietnam in 2008, but the average value of each relationshsip was similar,

at US$3.8 million; (iii) the annual growth rate of exports is many times higher than the annual growth rate

of export relationships indicating that it is easier to expand existing exports to existing markets than to

connect new products with incumbent or new markets or old products to new markets; (iv) if the intensive


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margin is defined as the export of old products to old markets (i.e. defined as relationships that existed at

the beginning and the end of the 5‐year sample period, most trade occurs at the intensive margin: in 2008,

99 percent of German exports were in products that went to countries that already existed in 2004. This

ratio was 98 percent for China, 94 percent for India and 93 percent for Vietnam.

Table 2A.12: Export Performance across Products and Markets, 2004‐2008

China India Vietnam Germany Tunisia Costa Rica

No. of export relationships in 2004 82,186 50,825 15,770 99,307 4,715 6,455

Realized (global) potential 2004 (%) 41.09 25.41 7.89 49.65 2.36 3.23

Average value of a relationship (US$

million)

11.48 1.97 2.20 16.75 1.51 1.80

Export value in 2004 (US$ million) 943,851.69 100,310.10 34,667.71 1,663,439.70 7,135.36 11,682.53

No. of export relationships in 2008 82,992 53,820 21,123 10,1542 4,047 7,316

Realized (global) potential 2008 (%) 41.50 26.91 10.56 50.77 2.02 3.66

Average value of a relationship (US$

million)

22.94 3.82 3.85 26.09 2.29 2.32

Export value in 2008 (US$ million) 1,903,742.30 205,808.06 77,506.98 2,648,772.80 9,260.61 17,039.00

Annual growth in export (04‐08, %) 19.17 19.68 22.28 12.33 6.73 9.89

Annual growth in exp. relation (04‐08, %) 0.24 1.44 7.58 0.56 ‐3.75 3.18

No. of “new” exports, 2004‐08, two‐year

cut‐off32

3,389 2,316 1,149 2,328 244 1,249

No. of relationships from Yr1 through Yr5 60027 31938 9592 76552 936 2160

Survival rate over 5 years (2004‐08) 73.04 62.84 60.82 77.09 19.85 33.46

Export value of relationships existing in

Yr1 and Yr5 (US$ million)

1,864,135.30 193,837.07 72,262.75 2,623,792.50 5,398.34 16,263.59

Intensive margin 2004‐08 97.92 94.18 93.23 99.06 58.29 95.45

Extensive margin 2004‐08 2.08 5.82 6.77 0.94 41.71 4.55

Source: Computed using data in Comtrade

Exports Relative to Factor Endowment


Distance between national

endowment and the factor

intensity of exports

Trade data from WITS; Endowment data from UNCTAD

To explain why a country’s exports cannot be sustained, one of several areas to investigate is whether the

exports that die represent attempts to produce goods that require a different mix of factor endowments

than supported by the economy. If a nation’s endowment point is represented by the intersection of its

average stock of physical and human capital, we can see how far or close to the average endowment point

32 Judging a “new product” using a two‐year cut‐off means that the export relationship did not exist in years n‐2 and n‐1, but did in years n, n+1, and n+2.


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are factor intensities of exports. By construction, it is the case that most low‐capital countries will be seen

to produce exports that have capital content exceeding their endowment point (to the north‐east). This is

because if the goods they produce are also produced by capital‐rich countries, the average capital content

of the export will be higher, reflecting the capital stock of all countries that produce those goods. Similarly,

for capital‐rich countries, their exports are likely to be to the south‐west of their national endowment

points. This will be the case if goods produced by capital‐rich countries are also produced by countries with

lower physical and human capital stock. Because of aggregation bias even at the HS 6‐digit level, this is a

pervasive problem in trade data. The insight, therefore, is obtained not by looking at the share of products

that exceed the endowment point, but the share of products that are distant from the national endowment

point regardless of whether the endowment point is on the lower or the higher ends of the axes.

Take the example of Nepal. With no exception, the most significant exports of Nepal in 1993 were in line

with the country’s factor endowments, with some embodying capital greater than the national average. By

2003, Nepal’s endowments had increased, and it produced an increasing share of exports with a higher

level of physical and human factor requirements. The major exports, however, remained close to the

endowment point.

Figure 2A.29(i)‐(iv): Export flows and factor endowments

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In the third picture, the orange colored dots show exports that existed in 1993 but not in 2003. The

majority of such exports were those that required a relatively high level of physical and human capital. Of

the 608 exports in 1993, 143 had disappeared by 2003. In the subsample of Nepal’s exports with revealed

physical capital index >50,000, the death rate by 2003 was 37 percent (87 dead among 236 exports). In the

subsample with revealed physical capital index <50,000, the death rate was 15 percent (56 dead among

372 exports). It can be hypothesized that, all else equal, ambitious ventures that defy a country’s

comparative advantage probably have a higher rate of failure. At the same time, by 2003, export activity

had increased substantially. There were 1510 products exported then, of which only 465 were also

exported in 1993. The majority of “new” exports that were active in 2003 (cranberry colored), but not a

decade earlier, were moderately capital‐intensive.

Success of exports depends on an array of factors, including accumulated national capabilities, search and

information costs related to the business of exporting, exchange rate volatility, among others. Deviation

from “generalized” comparative advantage is neither necessary nor sufficient for exports to die. In fact,

many successful exporting countries in Asia used policies to push the limits posed by static comparative

advantage to move into products exported by rich countries. However, if a country sufferes from high rates

of export death, this is one metric that ought to be looked at. This will be more relevant for smaller

developing countries than large ones. The average capital endowments of large developing countries like

Brazil and India may not be comparable to that of rich countries, but they are known to produce

sophisticated, capital‐intensive products such as helicopters and light aeroplanes.

PART 2: IMPLEMENTATION TOOLKIT COMPETITIVENESS DIAGNOSTICS

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Part 2B: Competitiveness Diagnostics


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Market Access

Link with competitiveness challenges identified in Trade Outcomes

Competitiveness challenge areas

Main components of market access

General Export Environment

Cost Competitiveness

Product extension and

Quality Market

penetration

Tariffs and quantitative restrictions Non‐tariff barriers Preferential trade arrangements

Quantitative analysis: indicators and data sources

Indicators Source

General restrictions

ROW average applied tariff, MA‐TTRI, MA‐OTRI

Tariff escalation ratio

Non‐tariff coverage ratio Zero or Preferential tariff

MFN zero‐duty exports ( percent of total)

Exports to PTA partners

Preferences utilization rate (%) and actual value (% of exports) in US, EU Product‐specific access

Applied tariffs and NTMs faced by the country’s key exports, compared to what peer exporters face in the world’s major markets in the North and South (matrix)

Number of major export products (HS6) that face tariff peaks (MFN>15%) in the world’s top 10 major markets.

Share of export value rejected from border in the past 12‐18 months

World Trade Indicators (which draws on Trains, Comtrade, ITC MacMap); WTO TPRs; Note that some of this data is now available via WDI Online

Descriptions of key indicators

Tariff average, simple and weighted: the extent to which a foreign market restricts imports can be measured by the arithmetic average of tariffs on goods (at an appropriate level of classification, such as the Harmonized Commodity Description and Coding System (HS) at the 6 or 8 digit level). A simple average includes statutory tariffs on goods in which trade flow is zero. The weighted average takes into account the tariff rate and the volume of imports. For very high rates of tariff, however, the weighted tariff under‐reports trade restrictiveness: a rate of zero and a prohibitively high tariff rate receive similar weights. Because no measure is perfect, it is common practice to report tariffs in all their forms: simple and weighted average, minima, maxima and standard deviation (UNCTAD 2008). Rest‐of‐the‐world (ROW) applied tariff: Following above, the ROW applied tariff average are rates imposed by a country’s export partners at the HS 6‐digit level, and can be reported either in simple or weighted form. Tariff escalation ratios: are calculated as the percentage change between the applied tariff for fully processed goods and applied tariffs for raw materials (or primary products). If tariffs are higher on finished products than on raw materials, they implicitly encourage the export of primary products. Because tariff escalation acts as a tax on value‐addition, developing countries face reduced incentives for industrial upgrading required to produce processed goods. Market Access Overall Tariff Restrictiveness Index (MA‐OTRI): Although measures of simple and trade‐


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weighted tariff averages, as well as tariff dispersion, are widely used, they are without theoretical foundation. Building on the work of Anderson and Neary (2003), World Bank economists have created indices summarizing all forms of trade restrictions – tariffs, quotas, licenses, etc. ‐‐ into a common metric by estimating the ad‐valorem equivalent of non‐tariff barriers at the tariff‐line level. They are then aggregated to produce a single tariff rate imposed by all trading partners on exports of a country in a manner that maintains the current level of exports. This uniform tariff is called MA‐OTRI (Kee, Nicita, and Olarreaga 2008). Market Access Trade Tariff Restrictiveness Index (MA‐TTRI): This is computed in the same manner as the OTRI, but only for tariffs (including preferences) imposed by trading partners on a country’s exports. Non‐tariff measure coverage ratio: is calculated by coding products (with a 0 or 1) within a category that are affected by at least one non‐tariff barrier, then multiplying the binary variable with the share of imports or exports, and summing, to produce a coverage ratio. This ratio is only indicative of the prevalence of non‐tariff barriers, and is silent on the restrictiveness. This weakness is similar to the one discussed above for weighted average of tariffs where a highly restrictive barrier acquires a low weight by reducing trade flows (UNCTAD 2009). Anti‐dumping and countervailing duties: In practice, anti‐dumping duties are almost identical to tariffs, and are generally expressed ad‐valorem. However, as discussed earlier, the process of determining these duties can be highly distortionary and interruptive. Active use of anti‐dumping measures by a country can lower export of unconcerned products, and aggregate exports to that country.33 Ideally, all these effects should be accounted for, but there is no common technique available to do so. The tariff‐equivalent of anti‐dumping duty is expected to be slightly larger on domestic price of imports because part of the ordinary tariff is normally absorbed by exporters. With anti‐dumping duties, however, exporters have no incentive to lower the price (Deardorff and Stern 1997). Countervailing duties are also levied like tariffs, but their purpose is to offset any subsidies given by foreign governments.

Qualitative analysis: interview targets and issues for discussion

Senior policymakers at the Ministry of Trade and/or Foreign Affairs

Do exporters make use of negotiated tariff preferences? Or, do they instead opt to pay for the MFN rate because the costs associated with meeting the rules of origin or preparing official documents to qualify for reduced duties are onerous?

What explains the country’s low penetration in x market despite having a preferential trade agreement? Are ROOs too restrictive to be eligible for preference; or are exports uncompetitive to the extent that the tariff margin does not compensate for higher productivity of competitors?

Is there correlation between recent surges in exports and increased stringency in the application of SPS and TBT, or in the number of anti‐dumping and CVD investigations initiated against their exports? Is there also a correlation between recent cuts in the importing country’s tariffs, and its shift towards increased use of trade remedy laws?

Chambers of Commerce

What is the experience of major exporters in complying with non‐tariff barriers, especially those related to sanitary and phytosanitary, technical, and security/terrorism standards? How much do these compliance costs typically

33 Vandenbussche and Zanardi (2010) found that in India and Mexico, both active users of anti‐dumping measures, aggregate annual imports decreased by around 7 percent.


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add in terms of tariff‐equivalents? How readily do policymakers or staff in embassies take up concerns in bilateral

negotiations, or at the WTO on behalf of exporters?

Major exporters Are tariffs so high that they drive home exporters out of competition despite enjoying lower input costs or higher productivity than in countries which happen to enjoy tariff preferences? Are BTAs signed by the export destinations leading to trade diversion?

Have there been costly rejections of exports in the past 12‐18 months? List products (e.g., nuts, shrimps, honey) and countries that rejected them? What were the grounds? The SPS Agreement requires that regulation be based on scientific principles and not maintained without sufficient scientific evidence except in cases of scientific uncertainty. Was this complied with or did you reckon them to be arbitrary, excessive and a form of disguised protection? What was the cost incurred by the exporter? Could export “tragedies” be avoided with better information?

Export promotion agencies

When the SPS and TBT concerns on the part of the importer are genuine, why kind of capacity building initiatives are needed at home? How would you rate the service/capacity of domestic institutions in place to facilitate exports regarding testing standards, pre‐shipment inspections, etc.?

Analytical approach

For a rapid diagnostics aimed at understanding the major trade policy barriers a country’s major exports

face, following is a simple two‐stage analytical process that can be followed.

Step 1: understand the structure of tariffs affecting key exports:

High or peak tariffs. Is Country B a major export market for County A in terms of existing size

(e.g., USA or Germany) or growth potential (e.g., China, India, Brazil)? Does Country B have high

tariffs (or peaks) on major exports from Country A? Does it escalate tariffs to deter import of

value‐added goods? Are there tariff‐rate quotas (TRQs)? As an example, the United States has

high MFN applied duties against the import of HS 240120 (tobacco, partly or wholly

stemmed/stripped). The average tariff for LDCs is over 77 percent. However, an African LDC like

Malawi qualifies for a zero tariff, but a non‐African developing country can face a specific tariff

of US$5480 per ton, or a tariff‐equivalent of 158 percent. It would be highly difficult to compete

in an identical product when a competitor has a substantial margin of tariff preference which is

the case in many agricultural and labor‐intensive manufactured exports.

Penetration of markets. Because the tariff rates faced by a country as well as its competition

determine the depth of one’s market access, it is crucial to know about other competing

countries that export similar products as Country A. In the example in Table 2B.1, exports in

2008 of product category HS 6204 (women's suits, jackets, etc.) to the world’s four major

importers are shown. China, Turkey, Vietnam and Romania are large exporters of the product. In

Bangladesh and Morocco, both products were important, accounting for 8.8 and 4.6 percent of

their total exports. In the US, Morocco’s export is substantially less than that of Bangladesh,

despite the fact that Morocco has a free trade agreement with the US, and qualifies for reduced

tariffs. In HS 6204, the MFN tariff which Bangladesh pays is 14 percent. Morocco is eligible for


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the preferential rate of 2.8 percent. While its focus on the EU market is understandable given

the geographical proximity, the under‐penetration of the US market is worth exploring. Why are

preferences being under‐utilized in a lucrative market? While the rate of utilization can be

calculated quantitatively, the reasons will have to be gathered through qualitative assessments

and interviews.

Table 2B.1: Major importers and exporters of HS 6204 (Women’s suit) in 2008 (%)

World (US$) Bangladesh China Morocco Romania Turkey Vietnam

Canada 1,144,146 4.49 58.11 0.48 0.94 1.75 2.14

European Union 13,007,403 4.36 41.80 7.62 ‐‐ 14.12 2.06

Japan 3,388,246 0.06 82.04 0.39 0.48 0.22 2.85

United States 12,411,131 4.73 38.63 0.32 0.25 0.49 7.84

Source: ITC Trade Competitiveness Map

Margin of preferences. Does one or more of the competitors receive a preferential tariff either

through a regional, bilateral or unilateral arrangement from a major importing country? What is

the margin of preference? Does this margin received by competing countries outweigh any cost

and price advantage that Country A enjoys? If Country A receives preferences itself, are they

negated by compliance criteria such as tight rules of origin (ROO)? For small, least developed

countries, concessions on market access appear to be more important than for larger exporters

that rely on scale and cost advantages to be competitive despite having to face negative

preferential margin on tariff.

Step 2: find out about the main non‐tariff barriers faced by exporters:

In addition to tariffs, several trade instruments can potentially be invoked to restrict market access,

including quotas, anti‐dumping and countervailing duties, and safeguards. Other provisions can also be

applied with restrictive intent, such as technical safety and sanitary requirements, and compliance with

intellectual property rights. Major questions to ask on non‐tariff barriers are:

Technical regulations. To what extent SPS and TBT measures represent prominent restrictions to

exports? Are these measures perceived as justified or used to restrict trade? Is compliance

difficult and expensive? Are procedures cumbersome? Is the information publicly available and

accessible? Are the problems related to the measure itself or the inspection at the border? Are

these SPS/TBTs applied on an MFN basis? Are there any mutual recognition agreements for

standards with key partners and at the regional level?

Incidences of trade remedy action. Is a particular export part of an industry that is a frequent

target for trade remedy actions? Has there been an anti‐dumping investigation against your

export in the past 18 months?34 By which country in which product and industry? Did the

34 See Bown (2010). Petitions to apply trade remedy laws increase during recessions. According to the World Bank’s Global Anti‐dumping Database, the number of trade remedy investigations increased after mid‐2008, only declining in the final quarter of 2009. Yet because several prior investigations were concluded then, the actual


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investigation lead to an actual imposition of duty? Has there been a CVD investigation, and was

the duty imposed? Has there been a safeguard measure applied? Was export restricted? How

did those actions affect your export?

Quotas and other NTMs: do exporters face tariff‐rate quotas on some key export products? Are

surtaxes, beyond tariff, common?

While tariff and non‐tariff barriers are explicit policy‐induced barriers to foreign market access, several

other factors affect market access, such as geographic distance and cost of transport, colonial, linguistic

or cultural affinity; exchange rate misalignment, costs related to search and information as well as

contract enforcement. These are, however, not related to direct trade policy measures in the sense that

they are hard to change through unilateral action, or bilateral, regional, and multilateral negotiations.

Tailoring the Diagnostics to Country and Sector Characteristics

Access to foreign markets are either granted on concessional terms to specific partners, or negotiated

multilaterally, regionally and bilaterally. Generally, preferential schemes applying to developing

countries depend on the stage of development, geographical or cultural proximity, and any specific

terms and conditions negotiated between governments. All country diagnostics need to know the

conditions under which foreign markets are accessible to a country’s products on preferential terms.

Table 2B.2 illustrates for a sample product (HS 610120) how tariffs can vary widely in the world’s three

major economies – US, Europe and Japan – depending on an array of criteria such as the following:

Developing Countries

Since the 1960s, developed economies like the US, Japan, EU and at least 10 other countries have

provided preferential access to exports from over 100 developing countries unilaterally under the GSP

(Generalized System of Preferences). National programs vary, however. The United States, for example,

does not include textiles and clothing exports in its GSP program. In Table 4, developing countries like

China, Pakistan and Sri Lanka pay the Most Favored Nation (MFN) tariff rate on their apparel exports to

the US. The EU, however, includes textiles and clothing in its GSP scheme from which countries like

Pakistan benefit. Chinese exports were disqualified for tariff preferences in the EU after 2004. The EU

also offers duty‐free access to a distinct subgroup of developing countries: under its GSP‐plus program,

beneficiary countries have to demonstrate that their economies are vulnerable and have to have ratified

and implemented the 16 core conventions of human and labor rights and at least 7 out of the 11

conventions on good governance and protection of the environment. Sri Lanka was among such

countries benefiting from GSP‐plus until it was suspended in 2010 for governance‐related issues. In

general rules of origin under the EU GSP require two significant processes to be performed within the

beneficiary country.

Least Developed Countries (LDCs)

The most favorable arrangement under the EU GSP is reserved for LDCs. The Everything But Arms (EBA)

barriers imposed increased.


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amendment which became effective in March 2001 extended duty‐ and quota‐free access to all

products originating in LDCs, except arms and ammunition. In Table 4, Lesotho and Bangladesh benefit

from zero tariffs in the EU as LDCs. The acronym “LDC” is often used generically to refer to any less

developed country. In the United Nations as well as the WTO agreements, however, LDCs refers to a

distinct group of low‐income countries classified by the UN to include those with, i) gross national

income (GNI) per capita under $905, ii) poor Human Assets Index (HAI) based on indicators of nutrition,

infant mortality rate, education, and the literacy rate, and iii) economic vulnerability in terms of

population size, remoteness, export concentration, homelessness from natural disasters, etc. There are

49 LDCs at present, but countries like Equatorial Guinea, Maldives and Samoa are set to graduate.

The Japanese and Canadian programs are simpler and cover almost all products except, for example,

eggs, poultry and dairy in Canada, and rice and sugar in Japan. To qualify for preferences in textiles and

clothing, exporters generally have to satisfy double transformation rules of origin (fabric and clothing).

In recent years, large developing countries like China and India have also unilaterally begun to grant

preferences to LDCs on a negotiated list of products.

Importantly, one of the pending items in the unfinished Doha Development Agenda is the pledge by

WTO members in 2005 to make it compulsory for developed countries, and voluntary for developing

countries, to give duty‐ and quota‐free market access to all exports from least‐developed countries

(LDCs). The flip side of this pledge was that 3 percent of tariff lines could be exempted from receiving

zero tariff rates. Because LDC exports cover a narrow range, this clause could negate any meaningful

access the LDCs can receive.

African, Caribbean and Pacific Countries

The group of African, Caribbean and Pacific (ACP) countries, now numbering 77 (excluding South Africa),

has traditionally received generous tariff preferences on a broad range of products than those covered

under the EU GSP (Staritz, 2011). In Table 4, Kenya benefits from this scheme. The US does not have a

specific program for LDCs, but it provides duty‐free treatment on approximately 83 percent of tariff lines

from 15 Asian LDCs, 88 percent of tariff lines from selected Caribbean and Andean countries, and 98

percent of tariff lines for several low‐income countries under the Africa Growth and Opportunity Act

(AGOA). In Table 7.4, Kenya and Lesotho benefit from AGOA preferences in the US, but LDCs from

elsewhere (like Bangladesh) do not on apparel‐related exports, and pay the same MFN tariff as larger

developing countries like China. The ROOs require at least 35 percent value‐addition which the poor

countries find hard to meet. For apparel, the rules are more relaxed with options to source inputs from

third countries.

Trade Agreement Partners

The third type of countries that benefit from preferential market access are those that have signed

bilateral or regional trade agreements with the major importing countries. This includes the EU’s

Economic Partnership Program (EPA) – a web of bilateral trade agreements. To qualify for preferences,

exporters have to satisfy rules of origins, such as minimum value‐addition or change of tariff heading.

The latter requires that the value addition should be sufficient to change the tariff classification of a


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product either at the HS 4 or 6 digit levels. The United States also grants favorable market access to

partners in its regional trade agreements like NAFTA, and nearly 20 other agreements with specific

countries. To qualify for preferences in textiles and clothing, exporters generally have to satisfy triple

transformation ROO (yarn, fabric and clothing). For less developed countries from Africa, ROO allow to

source inputs (yarn and fabric) from third countries and undergo a single transformation.

Table 2B.2: How tariffs differ Illustration of HS 610120 (Men’s or boys’ overcoats, cloaks, anoraks)

KENYA SRI LANKA LESOTHO BANGLADESH PAKISTAN CHINA

USA: The US gives zero tariffs to SSA, NAFTA, Central American and Caribbean, and Andean countries.

0 15.9 0 15.9 15.9 15.9

AGOA preference

Not an LDC; and apparel not included in US GSP for developing countries

AGOA preference

An LDC, but receives no preference

Full applied MFN duty; bill proposed in US Congress to grant preference to Pakistan

Applied MFN duty

EU: The EU gives zero tariffs to LDCs, EPA and GSP+ countries.

0 0 0 0 9.6 12

Preference received as a trade partner (EPA). But not an LDC

Neither an LDC nor an EPA partner, but receives preference as an incentive for sust. dev.

Preference received as an LDC, but also as a trade partner (EPA)

Preference received as an LDC. Not an EPA partner

Preference received as part of GSP

Applied MFN duty

JAPAN: Japan gives zero tariffs only to LDCs.

10.9 10.9 0 0 10.9 10.9

Applied MFN duty

Applied MFN duty

LDC preference

LDC preference

Applied MFN duty

Applied MFN duty

Source: Compiled from ITC MacMap (2010)

China is the only exporter that receives no tariff preference in any of the markets. Yet, in 2008, it was

the largest exporter of the above product (HS 610120) in all three markets (USA, EU, and Japan). This

suggests that it is able to offset higher tariff with productivity that results in either lower cost or higher

quality of the product. But tariff preferences are important to many exporters. Lesotho has no presence

in either the EU or Japan, but for a country of its size exports a substantial amount to the US taking

advantage of the preference and lenient rules of origin requirements. Both in the EU and Japan, Lesotho

enjoys preferences, but the rules of origin are harder to comply with, which explains its negligible

presence.

Market access in terms of tariffs and non‐tariff barriers vary widely by sector, namely agricultural and

non‐agricultural (or manufactured) goods. The diagnostics should therefore analyze market access

issues separately by sector, bearing in mind that within sectors, specific products can be subject to

distinctly high measures of tariff and non‐tariff restrictions.


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Non‐Agricultural goods

In developed economies, tariff and non‐tariff barriers against imports are generally low. The Overall

Trade Restrictiveness Index (OTRI) which summarizes the trade restrictiveness of tariffs as well as non‐

tariff measures in the EU, Japan and the United States ranged between 5 and 6.1 percent in 2006‐09,

according to the World Trade Indicators (WTI). This is historically very low, even though the average

does conceal tariff peaks in specific items, such as labor‐intensive manufacturing goods like footwear

and apparel, as shown in Table 2B.2. The emerging developing countries like India, who argue that they

are still in the process of industrialization, maintain higher trade restrictions in non‐agricultural goods.

Figure2B.1: Overall Trade Restrictiveness Index (%), 2006‐09

Applied MFN Tariffs and Non‐Tariff Measures in Selected Countries

As seen in Figure 7.3, the OTRI of India is 17 percent. China’s restrictions came down substantially during

the course of its negotiated accession to the WTO in 2001. Tariffs aside, non‐agricultural goods are less

susceptible to sanitary and technical barriers,35 but are perhaps more vulnerable to anti‐dumping

petitions and other contingent measures.

Agriculture goods

In contrast to restrictions in industrial goods, the richest countries of the world continue to maintain

high levels of tariff and non‐tariff restrictions in agriculture. In the EU and Japan, the OTRI for

agricultural goods is above 50 percent. In the United States, it is nearly 20 percent. Developing countries

like China and India also restrict agriculture goods, primarily to safeguard the interests of small farmers.

Agricultural goods are more sensitive to sanitary and phytosanitary conditions, increasing their

vulnerability to rejections and costly precautionary measures.

Services

35 An exception to this is fisheries. At the WTO, tariffs on fish products fall under the Non‐Agricultural Market Access (NAMA) negotiations.

58.48

52.95

39

19.85 18.66

5.03 5.86

17

6.159.45

EU Japan India United States China

Agriculture Non‐Ag


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The WTO’s General Agreement on Trade in Services (GATS) envisions “four modes” through which trade

in services occurs:

1. Mode 1: cross‐border supply – user in one country receives service from a provider abroad (e.g.,

financial, accounting and other professional services, IT‐enabled medical diagnostics and advice,

online energy trading)

2. Mode 2: consumption abroad – user moves abroad to consume a service (e.g., tourists, health

patients)

3. Mode 3: commercial presence – user is offered service by entities owned by foreign providers

(e.g., foreign‐owned subsidiary in insurance, telecom, or electricity)

4. Mode 4: movement of natural persons – service provider moves abroad to supply a service (e.g.,

doctors, construction workers)

Market access in services overwhelmingly focuses on modes 3 and 4. Mode 3 is essentially foreign direct

investment in services (e.g., South African telecom services based in other African countries). An

importing country could restrict this form of trade by imposing screening requirements, limiting the

number of service suppliers, value of transactions, number of persons employed, etc. The most common

restriction, however, is to cap the ownership of equity in firms by foreigners.36 Mode 4 is even more

contentious. While it is about temporary movement of service suppliers, it is easily tied to threats of

permanent movement or immigration if managed ineffectively. This is why most countries have

liberalized more the movement of skilled and corporate personnel than low‐skilled labor, in which poor

countries have an export interest. Remittance sent by temporary service suppliers (e.g., Bangladeshi or

Nepali construction/factory workers in Gulf countries) is becoming a major source of national income in

developing countries.

In modes 1 and 2, market access is much more in the control of exporting countries, as their

competitiveness is highly dependent on domestic regulations and capacity. For mode 1, the presence of

a technical or professional talent pool and decent infrastructure (especially telecom and internet

connectivity) are prerequisites. Take IT services: in 2008, the global market for outsourced IT services

was valued at US$250 billion and expected to grow by up to 9 percent per year until 2013; India and

Israel were the top two developing country exporters with US$23.1 billion (Engman, 2010). Other

countries like Argentina, Costa Rica, Malaysia, Russia and Sri Lanka are also seeing rising exports. In

addition to IT, professional services such as medical diagnosis, architectural design and consultancy,

accounting, distance learning can also be traded through mode 1.

For mode 2, infrastructure is key, not only for tourism, but especially healthcare. In 2008, more than

400,000 non‐residents purchased health services in the United States, 450,000 in India, 300,000 in

Malaysia, 410,000 in Singapore and 1.2 million in Thailand (Cattaneo, 2010). Thailand, in fact,

established the Long‐stay Management Corporation in 2002 to encourage elderly foreigners to visit the

country for long periods and take advantage of diverse care packages. Because portability of insurance is

important, it requested Japan to allow health insurance coverage for treatment of Japanese patients in

36 See the World Bank Group’s “Investing Across Borders 2010” report on FDI regulation in 87 economies.


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Thailand. Countries could, in fact, specialize in different segments of healthcare. While the United States

offers highly sophisticated services that are costly, other countries have developed capacities to provide

different services at affordable prices. Healthcare can also be provided through other modes, e.g.,

telemedicine (mode 1), hospitals established overseas (mode 3), and doctors/nurses moving to provide

services overseas (mode 4).

Beyond infrastructure and human resources, evolution and coordination of new regulations is critical to

facilitate market access for services trade through modes 1 and 2. These issues include privacy and

protection of data, recognition and harmonization of regulatory standards across borders, jurisdictions

regarding taxation and indemnity, and rules governing government procurement (Chanda, 2006).

Background reading: relationship between market access and trade competitiveness

Trade policies adopted by trading partners, as well as those implemented at home, affect how

competitive a country’s exports are in world markets. In commercial diplomacy, “market access” is a

broad concept referring to all measures that restrict a country’s exports in foreign markets. These

restrictions are a subset of overall trade costs. All else equal, access to a foreign market can be hindered

by a partner’s use of tariffs (taxes on imports) and non‐tariff measures such as quantitative restrictions

(quotas, licenses, voluntary export restraints), contingent protection (anti‐dumping measures,

countervailing duties, safeguards), and technical barriers involving safety and sanitary standards.

Increased market access is important to realize the gains from trade. Access to world markets allows

firms to exploit scale economies, reduce unit costs, and specialize. As shown in Table 2B.1, some

measures act as an absolute barrier to access (e.g. quotas, technical bans), but in general the main

channels through which barriers in foreign markets hurts export competitiveness are: i) by increasing

the fixed costs of entry – i.e. by raising prices of goods in the importing country through increased cost

of compliance and add‐on taxes (and if the tariff‐imposing country is particularly large in terms of its

share of the global market, the world price of the affected good could fall, hurting exports even in third

markets); and ii) raising risk – while tariffs are at least predictable, technical barriers raise significant

risks for exporters, who may invest in product development, production, and transport only to find their

goods rejected at the border.

Box 2B.1: Key issues and debates – external market access

Are LDCs taking advantage of market access? While market access has long been a concern on the trade agenda for developing countries, and it remains so in key areas like agriculture, most LDCs now have preferential market access to developed countries for an extensive range of manufactured products as well as many important agricultural commodities. But many developing countries struggle to take advantage of this market access. This is a function in part of non‐tariff measures (particularly around technical standards), but also more broadly reflects behind‐the‐border constraints in home markets that continues to render producers uncompetitive. South‐South trade and market access: With the growing importance of South‐South trade, market access among developing countries is becoming an increasing priority. Yet, tariff barriers among developing countries remain much higher than between developed and developing countries. Moreover, evidence


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from the recent global crisis suggests that developing countries are quicker to raise barriers against each other. On the other hand, technical standards tend to be less of a barrier to South‐South trade. Implementation of regional trade agreements: Perhaps because of the failure of multilateralism in Doha, the number of regional preferential agreements is growing rapidly. More new RTA agreements were concluded in 2009 than in any previous year. But implementation of RTAs has been slow. In fact, only 266 of the 457 RTAs notified to the World Trade Organization (WTO) as of February 2009 have actually been implemented.

Figure 2B.2 illustrates the main component factors that shape market access from a policy

perspective. Each of these components is then discussed in the remainder of this section.

Figure 2B.2: The main components of market access

Tariffs

Tariffs are taxes levied on imports mainly with the dual objective of protecting domestically produced

goods from foreign competition, and raising revenue to finance public expenditure. They can be

expressed either ad valorem, i.e., a fixed percentage of the declared import value, or as a specific tax,

which is a fixed amount per specified quantity, size or weight. Some tariffs can be expressed in both a

specific and ad valorem form. The level of tariff a country’s goods are charged by its trading partner may

well depend on whether the two countries have a preferential trade agreement, or are members of the

World Trade Organization, or neither. Tariffs that are levied in a non‐discriminatory manner on goods


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irrespective of their country of origin are called Most‐Favored Nation (MFN) tariff. Tariffs that have been

negotiated bilaterally or regionally to be less than the MFN level are known as preferential tariffs. To

qualify for preferential tariff rates, countries normally have to meet rules‐of‐origin criteria.

Box 2B.2: Tariffs, preferences, and rules of origin

When Country X applies a tariff of 19.7 percent, say on Men’s or Boy’s cotton shirt not knitted or crocheted (HS 62052020) from Country Y, but exempts tariff on the same import from Country Z with which it has a preferential trade agreement, all else equal, exporters from Country Z have a substantial price advantage over exporters from Country Y. If domestic firms in Country X also produce such items, they benefit too by making imports from Country Y less competitive. Even if exporters from Country Y are the world’s most efficient, they may still not be able to compete on price when tariffs are high. For exports from Country Z to qualify to enter X duty‐free, it may need to fulfill agreed criteria on rules of origin (ROO) and other non‐tariff barriers which can present a cost disadvantage in a manner that negates partly its positive margin on tariff. As explained in Staritz (2011), in the early 2000s, Bangladesh was the top supplier of cotton t‐shirts in the EU but did not figure among the top t‐shirt suppliers in the US. One of the reasons for this is that the EU grants Bangladeshi clothing exports duty‐free entry as an LDC and Bangladesh is able to meet the EU’s ROO requiring double transformation. In the US, by contrast, Honduras was the top supplier of t‐shirts followed by Mexico, El Salvador, and the Dominican Republic ‐ all countries that have preferential access to the US. Similarly, until 2000, nearly three quarters of clothing exports from Sub‐Saharan Africa (SSA) were directed to the EU where SSA countries enjoyed duty and quota‐free access under the Lomé Convention. However, only South Africa and Mauritius were important exporters there because preferential market access required fulfilling double transformation ROO. These export patterns have changed dramatically since 2000/01 when the US signed the African Growth and Opportunity Act (AGOA). Exports to the US more than doubled while those to the EU stagnated. Lesotho, Kenya, Madagascar and Swaziland became large clothing exporters to the US due to AGOA allowing quota and duty free access by requiring only single transformation ROO. A tight ROO regime favors countries with an “integrated” industry (such as manufacture of fabric and sewing of apparel). Those that only seek to add value mostly through labor fail to meet this requirement. Therefore, preferences programs that relax ROO, by requiring less value‐addition to qualify, or permit the sourcing of inputs from abroad are utilized more. At the same time, the rules ought not be relaxed too much so that it encourages trans‐shipment from third‐country exporters who merely use the preference‐receiving country as a port, and contribute little to the economy. The debate continues on what constitutes an appropriate balance between the goal of preventing trans‐shipment to encourage integrated production structure in poor countries on the one hand and the goal of offering preferential market access conditions on terms that can be fulfilled and used by poor countries on the other.

Non‐Tariff barriers

As import tariffs have been reduced worldwide, Non‐Tariff Measures (NTMs) have risen in prominence

and have become a major trade policy tool with important implications for exporters and importers.

NTMs include a wide category of instruments such as sanitary and phytosanitary measures (SPS),

technical barriers of trade (TBT), quotas, subsidies, anti competitive measures, import or export licenses,

export restrictions, custom surcharges, financial measures, and contingent measure. However, it is

necessary to make a distinction between non‐tariff measures (NTMs) and non‐tariff barriers (NTBs).

While NTMs may have a clear domestic goal of preventing unfair trade or protecting the health of

citizens, they become NTBs when used with clear protectionist intent to stop imports. NTMs are

therefore considered Non‐Tariff Barriers when they restrict trade. Quotas, prohibitions, non‐tariff


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charges, licenses, SPS and TBTs, and contingent measures are among the most prominent NTMs.

Exporters should identify whether their export products face any of these barriers and analyze the

impact on their competitiveness, in particular compared to competitors.

Quotas, prohibitions, licenses and non‐tariff surcharges

An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a

good that can be imported into a country in a given period of time. Above a certain quantitative

threshold, no imports are permitted into the country. Through negotiations at the WTO, most quotas

have now been converted to tariffs, or have taken form of tariff‐rate quotas (TRQs)37 in particular for

agricultural products. In a competitive setting, quotas and tariffs are alike in that just like a quota

truncates excess demand for an imported good, there can be found an equivalent level of tariff that

reduces imports by the same amount with identical effect on domestic prices. While tariff revenues

accrue to the government, rents from quotas can be captured by either domestic license holders, the

government if it auctions off quotas, or foreign suppliers in the case of a voluntary export restraint

(VER).

When the domestic industry is not perfectly competitive, however, quotas and tariffs that permit the

same volume of imports into a country can have different effect on domestic prices. Prices that

consumers pay under a quota are higher than with a tariff because a quota caps imports and leaves the

monopolist facing an imperfectly elastic demand curve. With tariffs, if the domestic monopolist raises

price, imports can increase. Quotas choke off a supply response, and restore a monopolist’s market

power in a way tariffs do not. This is illustrated in Figure 2B.3.

From the perspective of export competitiveness, quotas are more burdensome because irrespective of

the price competitiveness of an export, or quality, goods may not be permitted to enter a foreign

market after a certain threshold is reached. This is one of the reasons why, barring exceptional

circumstances, the WTO prohibits the use of quantitative restrictions. With the gradual elimination of

quantitative restrictions, and cuts in tariff, the focus of trade negotiations has increasingly turned to the

reduction of non‐tariff measures (NTMs). NTMs in Country A affect exports from the rest of the world.

But these could also hurt the competitiveness of Country A firms by limiting their options to source the

cheapest inputs.

Box 2B.3: Quotas in textiles and clothing

The global trade in textile and clothing (T&C) was distorted by an elaborate system of quotas for over 40 years until they were removed on December 31, 2004. The Multi Fibre Arrangement (MFA), in violation of the fundamental GATT principle of non‐discrimination, enabled developed importing countries to impose quotas, applied as negotiated “voluntary” export restraints against those imports from individual countries (“low cost suppliers”) deemed to cause or threaten market disruption in the importing country. The MFA, renewed several times between 1974 and 1994, continued and expanded in terms of product and country coverage two earlier regimes of protection, the 1962 Long Term Arrangement Regarding International Trade in Cotton

37 A lower tariff is charged until a certain quantitative threshold, after which a higher rate kicks in.


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Textiles and the 1961 Short Term Arrangement. These were ended by the Agreement on Textiles and Clothing (ATC), an outcome of the GATT Uruguay Round. The ATC froze the number of quotas in place in 1994 and set an irrevocable schedule for their elimination over a 10‐year transitional period (1995‐2004). While the purpose of the MFA was to restrain trade, it did result in some “benign” outcomes. As manufacturers/exporters shifted production from countries that faced a binding quota restraint to those that were less restrained by bilateral quotas, T&C industries sprung up in poor countries like Bangladesh and Sri Lanka that have remained competitive even in the post‐quota era (Waglé, 2005).

Export markets may also prohibit the import of some products. Moreover, both quotas and bans are

usually subject to licenses that may be granted automatically or given more restrictively on a non‐

automatically. Charges, taxes and other para‐tariffs may also increase the cost of the exported product

and hurt its competitiveness on the export market and. These may include customs surcharge and

services charges.

Figure 2B.3: Quotas and tariffs under different market conditions

Contingent protection

Contingent protection measures are applied as temporary deviations from a normal import policy, and

include anti‐dumping measures, countervailing duties, or emergency safeguards.38 Anti‐dumping duties

are levied against imports that are believed to be sold at prices below those in the good’s country of

origin or other countries. Such practices on the part of foreign exporters could be sporadic, persistent,

or predatory, the last of which provides the strongest economic justification for anti‐dumping duties.

Countervailing duties are levied on imports from countries that subsidize exports. Safeguard measures

are applied when surges in imports temporarily disrupt a domestic industry. Anti‐dumping and

38 See http://go.worldbank.org/C8SJJ4GW50


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countervailing duties are normally an issue that affects only large developing countries, like China, India,

and Brazil. Smaller countries seldom have the scale of production to actually engage in dumping or to do

it on sufficient scale to impact the domestic markets of trading partners.

Nowadays, Contingent protection may be used as a disguised protectionist measure. While, anti‐

dumping duties were almost exclusively levied by developed countries in the 1990s, developing

countries are now active users. In the last quarter of 2009, 26 WTO members initiated 26 product‐level

investigations under national trade remedy laws. More than three‐fourths of the cases were brought by

developing countries, of which 71 percent targeted exports from China. In the same quarter, 30

measures were imposed following prior investigations, of which 25 were by developing countries and

the remainder by developed countries (Bown 2010).

The process of establishing anti‐dumping and countervailing duties is also an important of distortion of

behavior and export flows. Anti‐dumping petitions are particularly disruptive, because in certain sectors

such as textiles and clothing that are frequently targeted, back‐to‐back investigations could be initiated

over many years. By the time a verdict is reached, trade flows could be severely curtailed. Often the

exporters affected are SMEs in poorer countries, whose ability to “dump” products is questionable in

the first place. For example, a series of anti‐dumping actions were imposed by the EU against bed linen

exports from India, Pakistan, Thailand and Turkey in the 1990s. By the time one of these disputes, on the

imposition by the EU of anti‐dumping duties on Indian bed linen imports, was settled at the WTO in

India’s favor in 2001, the disruption was such that exports had fallen from US$127 million in 1998 to

US$91 million. This led to job losses for 1,000 workers in the southern city of Pondicherry, where one of

the targeted firms was based. Even after the WTO verdict of 2001, the terms of the complaint were

altered slightly, and new anti‐dumping duties were applied. This illustrates how trade remedy measures

can take a long time to be resolved, the cost of arbitration is high, and the cases can be prolonged with

small changes to the original case (Oxfam 2004).

Box 2B.4: Catfish and the politics of anti‐dumping

In the late 1990s, the US became a major export market for Vietnamese exporters of catfish. Their inroads hurt the domestic producers, represented by the Catfish Farmers of America (CFA). The CFA argued that the Vietnamese catfish were not catfish, and lobbied the US Congress to include language in the 2002 Agriculture Appropriations Act that barred Vietnamese exporters from labeling their fish as catfish. The Act stipulated that only catfish of the species Ictalurus Punctatus can accurately be labeled catfish; the Vietnamese fish is of the family Pangasius. The Vietnamese complied by renaming their fish “basa” or “tra.” The change in name, however, had little effect on Vietnamese catfish sales in the US. The CFA then filed an antidumping petition alleging that the Vietnamese fish were being sold in US markets at unfair prices. The CFA petitioned for the low prices to be redressed with a dumping margin (tax) of 191 percent. The Vietnamese argued that their export prices were competitive because of the attributes of the Mekong River, low labor and feed costs, and traditional knowledge; and that there were no state subsidies involved. During the investigation, the US treated Vietnam as a “non‐market economy” and used prices from surrogate markets (Bangladesh and India). In January 2003, the US Department of Commerce announced a preliminary determination that imports of frozen basa and tra fish fillets were indeed being dumped, and that the margins against their imports had to be levied in the range of 38 to 62 percent. Duties on catfish prior to this investigation were under 5 percent. Source: Waglé (2003)


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Sanitary and phytosanitary requirements (SPS) and Technical Barriers to Trade (TBT)

SPS measures are applied by governments to protect human, animal, or plant life or health from risks

arising from the entry or spread of pests, from plant‐ or animal‐borne pests or diseases, or from

additives, contaminants, toxins, or disease‐causing organisms in foods, beverages, or foodstuffs.39 This

includes checking for pesticide residue in food, or subjecting animals to veterinary examination. For

example, the US mandates Hazard Analysis and Critical Control Point (HACCP) certification (which

requires processes to reduce the risk of contamination in food production) for imports of juice and

meat, and the EU has adopted a suite of standards governing the “farm‐to‐table” chain, targeting a

series of linked product and process standards governing food safety, animal health, animal welfare and

plant health. Similarly, TBTs refer to all technical regulations and standards applied to industrial

products and aimed at ensuring consumers’ health and safety.

While both measures aim at achieving legitimate policy objectives, they may be used to restrict trade

and serve as a non‐tariff barrier. The WTO SPS Agreement contains a number of provisions to ensure

that adopted SPS measures are not a camouflage for protectionism, such as, inter alia, the obligation of

any country wishing to introduce an SPS measure to conduct a scientific risk assessment; to

demonstrate consistency in its SPS actions; and to try minimizing negative trade effects, when designing

and adopting its SPS measures. However, trade regulations can be WTO‐compatible but also

discriminatory or may create an obstacle to trade due to its implementation.

Box 2B.5 The increasing importance of standards

As tariffs are being lowered, a new family of barriers has been introduced ‐‐ standards over products and processes. The ability to meet these standards has become central for market access, particularly in high‐income markets. Standards are both a threat for producers as it is generally a costly process and can act as a barrier to enter, particularly for small scale producers, and an opportunity as they provide the potential to enter high margin markets and improve capabilities of producers. There are three characteristics of standards as a barrier to global trade which differentiates them from tariffs and quotas: (1) Standards are not just established by governments, but also involve a range of private actors, particularly firms, international industry bodies and civil society organizations; (2) Unlike tariffs and quotas which are publicly codified, standards which producers have to meet are often neither widely publicized nor stable and consistent; (3) Unlike tariffs and quotas where there are established mechanisms to resolve conflicts (for example, the dispute resolution procedures under the WTO), the determination of performance with respect to standards is generally an asymmetric process, determined solely by the buying party or country, with the producer having little capacity to challenge decisions on conformance. A detailed discussion on standards and certification is included in the “Trade Promotion Infrastructure” section of the Toolkit. Source: Kaplinsky (2010)

Under the SPS Agreement, countries may depart from international standards if there is a scientific

justification or if a member determines that a higher level of protection is appropriate after conducting

a risk assessment. While the SPS agreement obliges countries to accept the sanitary or phytosanitary

39 SPS Agreement Annex A


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measures of other WTO members as equivalent if the exporting country can demonstrate that its

measures are adequate, the TBT agreement is softer in that countries can only give a “positive

consideration” to accepting as equivalent technical regulations of other countries. As Staiger and Sykes

(2009) argue, it is these kinds of provisions that give countries freedom to select their own level of risk

without much regard to the costs of achieving the regulatory target or the incidence of those costs on

exporters or importers.

Box 2B.6: Sanitary and environmental concerns as a non‐tariff barrier

Sanitary and environmental issues that appear alternately as food‐safety, as well as eco‐labeling requirements have acted as non‐tariff barriers. EU, for example, has adopted a policy of “zero tolerance” to fish products containing residual antibiotics chloramphenicol. The standards have led to a plunge in shrimp exports from major Asian exporters. Advances in the technology of seafood analyses have been made to the point that pesticide and pharmaceutical residues can often be detected at the parts per billion, and in some cases, at the parts per trillion levels. When zero tolerances are established based on the ability of a test to detect parts per million, the increase in sensitivity to ppb or ppt can turn a “safe” product to an “unsafe” one. Regulations that draw on HACCP (Hazard Analysis Critical Control Point) have made fish inspection programs tough; absence of such food safety guidelines at home means that standards of the richest importing markets are applied to imports from poorer exporters. In cases where sanitary requirements are scientifically justifiable, the appropriate course is not to lower those standards but help exporting countries meet the standards. Source: Mathew (2003)


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Incentive Framework: Trade and Investment Policy Note to the Practitioner: Many of the issues for analysis and the quantitative measures with regard to trade policy in this section are much the same as in the section for “Market Access”. In this section, the emphasis is on the import side – understanding how trade policy facilitates or creates barriers to accessing quality and cost effective inputs. In the “Market Access” section the emphasis is on the export side – how these same trade policies, imposed by current or potential trade partners, impacts the competitiveness of exporters.



Main components of trade and investment policy




Quality Market

penetration

Trade policy Export restrictions

Investment Policy

Exchange rates


Indicator Source

Import restrictions: tariffs and NTMs

MFN tariff all products, manufactures and primary goods– simple, weighted, max, dispersion

WDI/WITS‐TRAINS

MFN zero‐duty imports (% of imports)

Share of MFN tariff lines with international peaks, all products, manufactures and primary goods (%)

WDI/WITS‐TRAINS

Share of MFN tariff lines with domestic tariff peaks all products, manufactures and primary goods, %

WDI/WITS‐TRAINS

Share of MFN tariff lines with specific rates, total, manufactures and primary products (%)

WDI

Applied tariff rate, all products, manufactures and primary goods– simple and weighted average

WDI

Tariff rate with key PTA partners, all products, manufactures and primary goods– simple and weighted average

WITS‐TRAINS

Customs other import duties, total and in key products (% imports)

WDI

Customs and other import duties (% tax revenues) WDI

Non‐tariff measures frequency ratio TRAINS/WTI

Export restrictions Export taxes, total and in key products (% total exports)

WDI

Export taxes, total and in key products (% tax revenues)

WDI

Export subsidies, and presence of EPZs

Export surrender requirements, Y/N WTI

Export repatriation requirements, Y/N WTI

Requirement for licenses, Y/N WTI


103

Exchange rate Nominal exchange rate volatility (standard deviation) WDI

Real effective exchange rate (% change) WDI

FDI policy Foreign equity ownership index Investing Across Borders

Foreign equity ownership index – sector specific Investing Across Borders

Starting a foreign business – ease of establishment index

Investing Across Borders


The analysis outlined in this section can be mostly undertaken as desk research. For most countries, data

on tariffs and exchange change rate is quickly available. Moreover, significant existing research is likely

to have been conducted in recent years by the World Bank and other development partners such as the

World Trade Organization (WTO Trade Policy Review). It could be completed in a couple of days. Issues

that may be covered during interviews are outlined below. Depending on the size of the economy, field

work could be conducted in 10 to 14 days.

Policymakers: Interviews with director‐level or higher official staff is important to understand

the vision and policy objectives the government has been pursuing, including some background

on past policies and new directions. For example, the discussion should help shed light on the

political‐economic forces explaining the country’s existing structure of trade protection,

markets, and choice of exchange rate regime;

Exporters and business groups: How do major export‐oriented firms rate their experience of

sourcing inputs from abroad? Which of the factors do they find most constraining – i) tariff on

intermediate inputs, ii) overvalued exchange rate, iii) burdensome trade‐related measures, iv)

export taxes, v) other? The challenge is to interview exporters that may offer different views

depending on their sector and size. The sample should include large firms and SMEs, successful

exporters and some of their competitors, and if possible unsuccessful exporters. One way to

identify these players is to first identify market leaders and ask them about their competition.

Business groups, sectoral chambers, and export promotion agencies could also provide

information on potential candidates, including exporters that face difficulties to export.

Academia: in many countries, local scholars have studied development and could offer insightful

views on the role of the domestic trade policy on export competitiveness.

Interviews with government

Interview targets Key issues for discussion

Tariffs Ministry of Trade Ministry of Industry Ministry of Finance Customs Public Export and Investment

promotion agencies

Government trade policy objectives (e.g., export growth, export diversification, domestic protection, regional integration, industrial policy, etc.)

Applied MFN tariff structure: tariff bands and peaks; publication and frequency of tariff changes;

Preferential Trade Agreements Export promotion policies Export restrictions

Non‐Tariff Measures

Ministry of Trade Ministry of Industry

Find out which ministries and agencies setup trade related regulations


104

Ministry of Agriculture Other agencies responsible for issuing permits and licenses Customs / Single Window

Potential overlap/Coordination among ministries/agencies

Barriers to export Simplification of procedures and Single Window Use of risk management by Customs and other

border agencies

Exchange rate Central Bank Ministry of Trade

Government policy on exchange rate Role of exchange rate to promote exports and/or

protect industries

FDI Policy Ministry of Trade Ministry of Industry Ministry of Finance Investment Promotion Agency

Overall strategy with respect to FDI – sector‐specific targets

Sectors restricting foreign ownership Other specific requirements for FDI over and above

what is required for domestic investors Incentives available for foreign investors – terms,

requirements (e.g. only in SEZ)

Interviews with private sector and other institutions

General Issues How they perceive the government’s trade policy (e.g., supporting an open trade regime and exports or protecting domestic production)

If they perceive the government’s trade policy as business friendly, transparent, and predictable

How they perceive the government’s preferential trade policy (e.g., did they materialize in important market access?)

The most binding domestic policies for their export competitiveness Any specific incentives they benefitted or are benefitting from Discuss specific issues relative to the firm size (in particular small versus large) Top‐3 recommendations actions the governments should take to help them improve

their export competitiveness

Tariffs If they pay tariffs on their imports (which goods and what rates) Whether they feel that import tariffs are a burden for their export competitiveness An estimate of the share of import duties in their cost structure Are PTAs’ tariff schedule implemented effectively Is access to information on tariffs transparent Do they face obstacles at Customs with identification of the right tariff schedule If corruption is prevalent at Customs and is hindering their competitiveness

Non‐Tariff Measures

If NTMs implemented by their own country are perceived as hurting their export competitiveness

Whether compliance with NTMs is perceived as an obstacle in terms of number of requirements; bureaucracy; overlap and lack of coordination among agencies, etc.

If associated fees are moderate or high, and their approximate share in cost structure Time to clear goods (specify import and export regime) If there are procedures to contest decisions made by Customs and other border

agencies not to clear imported merchandise Is risk management used by Customs and other border agencies Any impact from State Trading Enterprises on their business

Exchange rate How the exchange rate is seen to be helping / hurting their exports How the exchange impacts their use of imported inputs / integration into global and

regional value chains


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Is the government’s exchange rate policy transparent and predictable Any issues they have with accessing foreign exchange Availability of hedging markets and instruments Any requirements for hedging due to volatility Links with access to finance and availability of loans in local currency v US$

FDI policy Is the government open to foreign investment in key input sectors (transport, ICT, energy)?

Are there any restrictions put on foreign investors outside what is clear in the law (e.g. through limited licenses, capping number of transactions, etc.)

Any restrictions on foreign exchange availability? What incentives are available to foreign investors?

Interviews with business groups (across all issues)

Same than above but at the sectoral/industry level Initiatives to alert the government about binding constraints and government’s

responsiveness/actions The government’s openness and responsiveness to their concerns and suggestions Examples of failures (e.g., lost export opportunities; non survival of new exporters) Key factors for success (in general and sectoral) Specific issues relevant to some firms by size or new firms

Analytical approach – key issues to understand

Component Main issues

TRADE POLICY: TARIFFS, NTMs, EXPORT RESTRICTIONS

MFN tariff regime 1. Complexity of import tariff regime

Trend in the simple and weighted average level;

Summary statistics: Min, Max, tariff dispersion (coefficient of variation in tariff rates, computed as 100 times the ratio of the standard deviation to the mean), tariff bands, frequency distribution of tariff rates;

International comparison; 2. Sectoral differences in import tariff regime

Distribution of tariff rates across products, sectors and industries;

Tariff escalation (imposing higher tariffs with each stage of processing) by product: e.g. look at tariffs imposed on first stage, semi‐finished and fully‐processed light manufacturing) as an indication in effective protection

Preferential tariff rates 1. Complexity of PTAs

Number of PTAs, their coverage, and implementation phase 2. Wedges between preferential and non‐preferential trade

partners

Customs duties 1. Revenue impact of import tariffs

Implicit tariff rates, i.e. the rates implied by actual tariff collections: a) customs duties collected as a percentage share of the total value of imports and b) custom duties collected as a share of only dutiable imports.

Implicit tariff rates by industry and by processing stage (first stage, semi‐finished and final) to see whether customs


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exemptions attenuate the escalation of statutory tariff rates

Specific tariffs (duties levied on the monetary value of imports): identify tariff lines with specific duties; infer ad‐valorem duties by calculating implicit tariff rates (duties actually collected as a share of import values).

Tariff revenues as a share of government revenues 2. Export taxes

Non‐tariff measures 1. Existence of quantitative import restrictions 2. Complexity and transparency of trade‐related regulations

Number of import licenses and permits

Technical barriers to trade and SPS 3. Import and export customs procedures

Differences between general and export regimes, if any 4. Identify any State Trading Enterprises and collect information

on their import and export practices

EXCHANGE RATE

Exchange rate 1. Nominal exchange rate policy

Volatility 2. Real effective exchange rate

Trend

Any misalignment with long run equilibrium exchange rate

International comparison with comparators and competitors

INVESTMENT POLICY

FDI policy 1. Foreign equity ownership restrictions Local ownership requirements

Other barriers (licensing, concessioning) 2. Other practical restrictions on FDI

Setting up a foreign business

Arbitration procedures 3. Incentives to promote FDI

General incentives – e.g. tax breaks

Sector‐specific issues


Summary of specific considerations by country‐type

Country type Relative priorities and issues for consideration


Likely to be heavily dependent on imports – pressure to use trade policy for import substitution, but import restriction would be a significant barrier to upgrading

Resource‐rich Exchange rate policies will be critical – potential for over‐valued exchange rate and volatility

Issue of export restrictions may arise from policies that aim to discourage commodity exports and increase value‐addition from domestic producers

State trading may be an issue

FDI policy with respect to resources sectors (e.g. Mining Code) will be critical

Low income, labor‐ Likely to be reliant on imported inputs in light manufacturing sectors – focus on


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abundant effective rates of protection and any policies that protect local monopolies

Check on use of FDI incentives in export sectors (e.g. light manufacturing) v input sectors (which are often more protected)

Middle income Non‐tariff barriers often a bigger issue

Protection of services sector (mainly through investment policies) an issue to check

Summary of specific considerations by sector

Sector Relative priorities Other issues for consideration

Light manufacturing

High reliance on imported inputs and intermediates in most light manufacturing sectors requiring a focus on import tariffs, and effective rate of protection

TBTs can become a disguised way to restrict imports.

State trading may arise as a by‐product of the nationalization of an ailing industry or as a means of pursuing government policies on products or industries considered to have strategic importance.

Many sectors will have special import regimes for imported inputs designed for export manufacture (e.g., Textile and Clothing)

Countries may extend preferential access in some sectors through PTAs

Trade facilitation

Cost and efficiency of key services

Agriculture Heavily protected sector with a prominent use of high tariffs and quotas

SPS can become a masked way to restrict imports

State trading is a common in many economies where agriculture is an important sector of trade, in developed countries as well as in agriculturally‐based developing countries, to provide price support for important agricultural products or ensure food security.

Export duties are mostly used for agricultural products

Countries may extend preferential access in some goods through PTAs

Services Investment restrictions critical, given that many services are nontradeable in a traditional sense

Export services such as transportation, tourism, professional services, and IT.

Regulatory barriers to entry

Competition

Background reading: relationship between trade and investment policy and trade

competitiveness

Countries raise barriers against imports for a number of reasons. On the one hand tariffs are a revenue

source for governments (increasingly less so in most countries, but still important in many developing

countries with limited alternative sources of revenue). At the other end of the spectrum, non‐tariff

measures, particularly technical restrictions, are often raised at least nominally to protect the health and

safety of consumers. But perhaps most importantly, tariffs, quotas, and NTMs, as well as exchange rate


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policies, are all often employed as part of industrial policies designed at best to support domestic “infant

industries” and at worst to protect long‐entrenched special interests. However, in an environment of

increasingly integrated global production, trade in inputs and components plays a critical role in the

competitiveness of most exporters. And so, a country’s barriers against imports to support the

development and growth of domestic economy can deter its own export competitiveness, mainly by

increasing the cost of inputs and final goods, and reducing the availability of imports.

Trade barriers distort production and consumptions prices and choices, and often translate in

misallocation of resources and protection of inefficient local industries. As such, import protection acts

as a tax on a country’s export sector, and export‐tax equivalents of import tariffs can be large for some

developing countries (Tokarick, 2006). An “anti‐export bias” arises, for example, when imported inputs

that are used in production are restricted (through high tariffs or other barriers), making it more difficult

for such exports to compete with similar products from other countries. Trade policy barriers against

imports hurt the export competitiveness of domestically produced goods and deter private sector

incentives to increase productivity, innovate, and enhance export potential. Potential efficiency losses

are greater when the domestic market is small and in industries intensive in intermediate products such

as light manufacturing. From a policy point of view, reducing import barriers would serve as an export

promotion strategy.

Trade policy has for a long time been designed with a mercantilist worldview, in which exports are good,

imports are bad, and the protection of domestic producers a priority. Governments put in place import‐

substitution policies to develop and support a domestic industry and provide jobs. But with the

emergence and proliferation of disaggregated production processes, transnational supply chains, and

cross‐border investment, trade policy is increasingly playing a greater role in supporting a competitive

export sector, and cross‐border integration. In addition to reducing tariffs, developing countries’

development programs aim to minimize trade‐related regulations and administrative frictions, as well as

facilitate the movement of goods. Services trade liberalization has also become a pillar of countries’

export competitiveness agenda. Governments’ strategy is not only to increase services exports but to

make services, as input to the industry, more efficient and cost effective.

Many developing countries have used trade and investment openness, together with sound domestic

policies, as a key motor for their development and have seen significant reductions in poverty and

increases in welfare. The literature provides strong evidence that an increase in the import of

intermediate goods boosts productivity and economic growth (Miroudot, 2009; Eaton and Kortum,

2001; Lee 1995). Empirical analyses also indicate that exporting firms are the most productive (Park et al

2009; Wagner, 2005)). This growth in productivity is a direct consequence of the rise in the number of

varieties of imported inputs trough the channels of a better complementarity with domestic varieties

and of learning effect of foreign technology. The increased diversification in imported inputs also entails

an increase in the number of domestic varieties produced and exported (Carrère et al, 2010).

Services also can be intermediate inputs when they are used to produce goods. Services trade policy

deserves a special attention and a differentiated treatment given the domestic regulatory nature of


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barriers to trade in services and the lack of information on these restrictions in the form of databases (as

in the case of tariffs, for example). The analysis of these barriers must be undertaken on a sector‐by‐

sector basis, relying on government documents and the expertise of sector specialists. Nevertheless,

global integration of the world economy is calling for increasing efficient services sectors, from the

development of transport and telecommunication sectors and efficient banking and insurance sectors to

professional business services to help exporters better compete in the international markets. With low

trade cost and efficient services, countries may gain a comparative advantage for services‐intensive

manufactured goods, an advantage that is enhanced if the country also produces intermediate services

more effectively or has lower barriers to entry for services suppliers.

Figure 2B.4: The Trade‐TFP relationship

Source: Carrere et al. (2010)

Some countries sought to benefit from international trade by promoting a dual economy, protecting a

domestic industry and supporting fully exporting firms by means of tax privileges and subsidies to grant

duty free access to imported inputs for exporters, hence removing or reducing price distortions, and

correcting anti‐export bias. Exporters could also benefit from other measures that remove or reduce

high transactions costs through efficient streamlined admissions of imports/customs clearance.

Export restriction measures also penalize exporters of the restricted products. By affecting the price and

quantity of trade, export restrictions produce trade distorting effects in the same way as import

restrictions. Export duties raise the cost of exported products, resulting in decreased export volumes,

which may then divert some supply to the domestic market, leading to a downward pressure on

domestic prices and reducing incentives for the suppliers to increase their production and investment.

Moreover, price volatility and unstable supplies contribute to create an insecure business environment.

Governments may apply different types of export restrictions (e.g., export bans, taxes, quotas, or

restrictive licensing). Governments may pursue various public policy objectives such as security; social,

health, and safety; and to control inflationary pressures and maintain adequate supply of essential

goods. The relative ease of implementing tax regulations through customs makes export duties an

attractive option for governments, especially when international prices are high (Box 2B.7). Globally,

export controls are more frequently imposed on primary commodities or scarce agricultural goods to

control their domestic price, and mostly by developing countries.


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Box 2B.7: Use of export restrictions by developing countries

In recent years, export restrictions have continued to attract the attention of trade policy makers, both as a perceived means to achieve certain objectives (e.g. value addition) and because of perceived gaps in international disciplines on their use. For example, following the peso devaluation in 2002, Argentina applied export duties to all exports in order to cushion the effects of exchange‐rate fluctuations on domestic products and to counter the sharp fall in tax revenue. After successive increases in rates, the applicable duties were 5, 20, 15, 20, 25 and 45% (depending on products) as of mid‐2006. In 2007, China eliminated value added tax (VAT) rebates on exports for 553 items to restrain the export of products regarded as highly energy consuming, highly polluting, and consuming large amount of raw materials. Since 1999, Cameroon has gradually prohibited exports of logs in order to promote the processing industry. From 1999 until the prohibition of log exports in 2004, a certificate of registration had to be obtained to export timber; this was intended to ensure that 70% of production was processed locally and only 30% of the annual harvest exported as logs. In 2007/08, the world experienced a period of high food prices, which was aggravated by export controls being imposed by some food exporting countries on major food exports. Such controls were undertaken to mitigate the impact on domestic prices, but by reducing international supply, they have been shown to actually exacerbate the increase of international prices. A study based on data for Argentina, a country with a long record of substantial export taxes and quantitative restrictions on food exports, shows that that such policies have in fact harmed the competitiveness of Argentina’s agricultural sector more than tariff and non‐tariff barriers imposed by its trading partners. Elimination of export restrictions prevailing in mid‐2007 in Argentina would increase production and employment levels of primary agriculture. In an attempt to increase value added, Mongolia imposed an export ban on raw cashmere between 1994 and 1996 and then imposed an export tax from 1997 to 2009. However, experience shows that unless a country has market power (which is clearly not the case in Mongolia, where neighboring China is also a major producer), the impact of export restrictions is to reduce domestic prices for raw material producers (livestock sector), encourage inefficient value addition, and/or promote the use of substitute inputs. In Mongolia, 15 years of export restrictions had no impact on industry value addition, but instead shifted more of the power and profits in the industry from the herders to the processers. Sources: Jeonghoi 2010, and Nogues (2008); World Bank (2003)

However, export restrictions can also act as an implicit subsidy when they aim to promote downstream

industries by providing them with an artificial competitive advantage. Indeed, such measures create a

differential between the price available to domestic processors and the price charged to foreign buyers,

and thus provide domestic processing industries using the concerned products with an advantage.

Production distortions result from the fact that too much is produced in the exporting country’s

downstream industry, while too little is produced in the importing country’s downstream industry. This

production efficiency loss is sometimes justified by the “infant industry” argument. However, it is not

clear whether this infant industry strategy leads to successful results.

The real exchange rate also plays an important role in countries’ export competitiveness. Note that the

emphasis should be on the real exchange rate rather than the nominal rate because what matters for

private‐sector profitability is the ratio of unit price over unit costs. In general, exchange rate policy

should target the (hypothetical) equilibrium real exchange rate, which should reflect long‐run


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fundamentals of the country, in terms of relative prices in domestic markets. Directed policies to

support either an overvalued or undervalued exchange can impact relative competitiveness. Both can be

detrimental over the long term.

An overvalued real exchange rate, defined as the ratio of global prices expressed in domestic currency

over the domestic prices and often defined as the ratio of tradable‐goods prices over non‐tradable

prices, can hurt export competitiveness, through several channels.

First, an overvaluation of the real exchange rate makes exporters’ goods expensive in foreign

markets either by raising the prices of exported goods and services in foreign currency terms

through two potential channels. One the one hand if the real exchange rate is over‐valued due

to a nominal appreciation, the foreign currency price of exports is excessively high thus reducing

foreign demand for exports. On the other hand, if the over‐valuation is due to excessively high

domestic inflation relative to global inflation, then domestic costs of production would be

artificially high, thus reducing profits from exporting or firms would be forced to raise their

prices thus reducing foreign demand.

Second, while an overvalued exchange rate makes imports cheaper, political economic

pressures build up to increase trade protectionism to support import‐competing firms that find

it more difficult to compete against cheaper imports, hurting the export competitiveness of

export‐oriented industries. It also diverts government resources to less efficient production in

the domestic market;

According to this analysis, exchange rate depreciation to bring the real exchange rate closer to

equilibrium (driven by the relative productivity of the economy) would stimulate exports and curtail

imports, while exchange rate appreciation would be detrimental to exports and encourage imports.

However, In the presence of high import content or in countries that are substantial net oil importers,

exports are less adversely affected by currency appreciation because the lower import prices due to

appreciation reduce the cost of export production and generate productivity improvements. Service

exports, nevertheless, with very low import content, tend to suffer from currency real appreciation.

Under‐valuation also cannot be an optimal or a long‐term policy. While under‐valued exchange rates,

subsides and suppressed wages can boost exports in the short term, this is not the same as

competitiveness secured through productivity growth. According to Porter (2006), competitiveness has

to be about enhancing an economy’s productivity measured by the value of goods and services

produced per unit of a nation’s human, capital and natural resources. Indeed, a number of countries –

including Austria and more recently FYR Macedonia – have used a rigid exchange rate as a way to force

exporters to improve competitiveness rather than rely on devaluation. Evidence from both countries

suggests it can be highly effective over the medium term.

Furthermore, the maintenance of an under‐valued real exchange rate can be costly and unsustainable

over long periods of time. This is so because it requires sterilized intervention in foreign exchange

markets, usually by the monetary policy authority. As capital flows in, the monetary authority buys

foreign exchange with domestic currency, which can be inflationary. To reduce inflationary pressures


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from the growth of the monetary base, the monetary authority usually engages in open market

transactions by issuing public bonds (either Central Bank or federal government paper) in exchange for

domestic currency, which is withdrawn from the market. However, as the supply of domestic bonds

increases, domestic interest rates must rise in order for market agents to hold the additional bonds

denominated in domestic currency. Consequently, capital inflows would tend to rise as domestic

interest rates rise, thus requiring another round of sterilized intervention. In some instances, the

government can force domestic economic agents to hold additional domestic bonds at a constant

interest rate, but this requires an additional distortion. For instance, in some countries state‐owned

banks can be forced to accept additional bonds at an artificially low interest rate. This would imply that

depositors are forced to accept artificially low deposit interest rates. Other policy instruments, such as

financial transactions or capital inflow taxes could also be implemented to reduce pressures on the real

exchange rate while also raising public revenues. Finally, it is worth noting that a fiscal contraction (e.g.,

a reduction of the primary fiscal deficit or an increase of a surplus) could also help reduce real exchange

rate appreciation by reducing domestic interest rates (thus reducing incentives for capital inflows) and

reducing domestic inflationary pressures.

In addition, volatility of exchange rates raises uncertainty and may force exporters to shift to less risky

activities (products or markets) – this could raise costs through adjustment as well as contribute to a

suboptimal allocation of resources. The negative impact, however, depends on access to information,

attitudes towards risk, and market structures – they will be most acute in financially underdeveloped

countries economies that do not provide hedging instruments and opportunities enabling firms to guard

against this risk (Eichengreen, 2008).

Finally, investment policy – specifically policy with respect to FDI – can play an important role in

supporting competitiveness of a country’s exporters. This is not least because foreign investors tend to

be over‐represented in the export sector, particularly in countries with relatively limited home markets.

Research on FDI shows not only that they tend to be more productive than firms in the domestic

market, but most importantly, that they generate spillovers to domestic firms in the backward‐linked

supplying industries (Javorcik, 2004), thus contributing to wider productivity growth. Foreign investors

also can play a critical role in introducing greater competition in local markets, breaking down the local

monopolies that can be a source of poor input competitiveness and anti‐export bias.

Main components of trade and investment policy analysis

Trade policy is more conducive to economic growth and business friendly when it is open, transparent,

and predictable. However, governments may use various instruments to control trade flows, generate

revenues and protect domestic production and employment. Analyzing a country’s trade policy and its

implications for competitiveness requires an assessment of several instruments, including: i) tariff

policy; ii) non‐tariff measures; iii) restrictions on exports; iv) exchange rate policy; and v) investment

policy. This is outlined in Figure 2B.5.

Tariff policy

Several trade and competitiveness issues are related to import tariffs:


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(i) Import tariffs increase the cost of inputs and intermediate goods, increasing the domestic

production cost. They also tend to restrict the variety of goods affordable to producers that

seek to be competitive on international markets;

(ii) Relatively high average tariffs introduce an anti‐export bias into the trade regime as they

make it more attractive for companies to produce for the protected domestic market rather

than to sell overseas. Duty‐drawback and import‐under‐bond systems can only partially

offset this anti‐export bias, while at the same time introducing additional administrative

burdens on enterprises. Also, reducing prohibitively high tariffs provides benefits in the form

of increased tariff revenues, and less incentives for fraud, corruption, and smuggling.

(iii) High levels of tariff dispersion – the degree to which different sectors or products within a

sector face different tariff levels – can also introduce significant distortions. Dispersion often

results from the use of excessive exemptions and tariff escalations. Countries with

significant tariff dispersion often show a large number of tariff bands, with certain sectors

being protected through particularly high rates of protection. This has a distorting effect on

resource allocation within the economy.

(iv) Higher tariffs on final products than on inputs increase the effective rate of protection (ERP).

By taking into account protection on both outputs and inputs, ERPs provide a better

representation of tariff‐generated transfers to producers than nominal rates of protection,

which are based on protection of outputs only. High effective rates of protection shield

inefficient producers from adjusting to changing needs.

(v) Although tariff reduction through PTAs has become widespread, lack of implementation of

PTAs and overlapping commitments may complicate business operations and access to

information. Moreover, while PTAs often lead to trade expansion among Members, by

making imports from other PTA Members cheaper, they may also hurt export

competitiveness when countries keep high MFN import tariffs with the rest of the world. In

that case, PTAs may lead to trade diversion away from more competitive non‐Member

countries, and hence hurt firms’ efficiency and competitiveness.

While economists and policy makers might not agree on the optimal level for tariffs, putting in place an

uniform tariff presents several advantages including the fact that (i) effective protection is the same for

all sectors and equals the nominal protection rate; (ii) it is simple, clear and transparent, and therefore

reduces business costs; (iii) it reduces the cost of the customs administration; and (iv) it reduces

discretion (corruption). Moreover the manner in which countries choose to reduce tariffs has important

implications in terms of export incentives. Tariff reduction schemes that exempt high tariff or sensitive

sectors could leave countries off by creating more distortions. However, a strategy that aims at reducing

all tariffs, and high tariff are cut more than low ones, would do the most to improve export incentives

and real income (Tokarick, 2006).


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Figure 2B.5: Framework on the relationship between trade policy and competitiveness

Box 2B.8: Avenues to reduce tariffs

The World Trade Organization multilateral trade rounds have helped reduce goods ‘bound’ tariffs, which are the maximum tariff rates WTO Members countries can apply to imports from other WTO Members. However, autonomous or unilateral liberalization of trade barriers has accounted for most of the trade liberalization in developing countries over the past two decades. Hence, applied tariff rates globally are well below their maximum allowable or “bound” rates. Countries may also reduce their tariffs through preferential or regional trade agreements. This option could lead to deeper integration including some traditionally sensitive sectors such as agriculture and services. Regional trade liberalization may be even more central for trade in intermediates, which are more sensitive to trade barriers and have an important regional dimension. Trade liberalization can go further and investment and trade in services are also likely to be liberalized. However, liberalization vis‐à‐vis selected partners while maintaining MFN at high levels lead to large wedges between levels of protection between preferential tariffs and those levied on imports from the rest of the world. These discrepancies may generate distortions across sectors in the economy and losses of tariff revenue as importers switch from third country suppliers to partner producers to take advantage of tariff preferences.

Non‐Tariff Measures (NTMs)

As import tariffs have been reduced worldwide and locked in under the twin pressures of multilateral

rounds and preferential agreements, non‐tariff measures (NTMs) have grown significantly, and now

represent one of the most important areas of concern in trade policy. It is estimated that between one‐

third and two‐thirds of traded goods are affected by one or more non‐tariff measures, with technical

standards being the most prevalent. Unlike tariffs that increase directly the price of imports and

indirectly import quantities, NTMs tend to limit directly import quantities and indirectly the cost of

imports. NTMs tend to have a significant trade‐reducing affect, on par with tariffs. Estimates by

Hoekman and Nicita (2008) suggest that cutting the ad‐valorem equivalent of NTMs in half (from around

Tariffs

High import cost / anti‐export bias

Exchange RateNon‐Tariff Measures

MFN Tariffs

Effective Rate of Protection

Preferential Tariffs

Quantitative restrictions

Permits and Licenses

State Trading Enterprises

Export Taxes

Management (over / under valuation)

Exchange rate volatility

Real Effective Exchange Rate

Business Environment

Trade Facilitation

Investment Policy

FDI regulations

Mergers and acquisitions laws

Foreign exchange laws and regulations

Export restrictions

FDI incentives

Export taxes

Bans and quantitative restrictions

Permits and Licenses


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10% to 5%) would boost trade by 2‐3%. Some NTMs are called Non‐Tariff Barriers (NTBs) when they

intentionally aim to restrict trade such as import quotas that limit the quantity of some goods that may

be imported. However, NTBs have been reduced since the WTO forbids quantitative restrictions.

Nowadays, NTMs are typically trade‐related regulations such as technical barriers to trade (e.g. product

standards or labeling requirements) that may be imposed for legitimate purposes, such as protecting

public health or the environment, but that may restrict trade either intentionally or unnecessarily.

Governments may twist normal health and safety standards or custom procedures so as to place

additional costs on foreign exporters, thereby limiting imports. UNCTAD developed a standard

nomenclature for defining the categories of NTMs. This provides perhaps the most comprehensive

definition of NTM, and includes:

Sanitary and phytosanitary measures (SPS)

Technical barriers to trade Pre‐shipment inspection and other formalities

Price control measures

Licenses, quotas, prohibitions and other quantity control measures

Charges, taxes, and other paratariff measures

Finance measures

Anticompetitive measures

Trade related investment measures

Distribution restrictions Restrictions on post‐sales service Subsidies (excluding certain export subsidies included under export‐related measures)

Government procurement restrictions

Rules of origin Export‐related measures

Moreover, when poorly designed and adopted with little consultation with the private sector, NTMs

may hurt competitiveness by constraining the ability of companies to outsource key inputs, putting

them at a competitive disadvantage on international markets. NTMs also often complicate day‐to‐day

business and distract managerial attention. Firm surveys highlight private‐sector demands for more

transparency in the adoption and application of NTMs across countries. Streamlining cost‐raising NTMs

is now recognized, in many countries, as a key component of national competitiveness agendas.

With the prominence of NTMs and their relatively opaque impact on imports, and hence exports that

rely on imports, streamlining of NTMs has become an important component of any competitiveness

agenda. Since governments can use NTMs to pursue different policy objectives and may be

implemented by various government agencies, it is crucial that they be transparent, consistent, efficient,

non discriminatory, and the least trade‐distorting. In reality, NTMs habitually lead to excessive, complex,

costly and often redundant procedures that dampen the competitiveness of importers and exporters,

even when implemented for legitimate public policy objectives.

Below are some key principles required by the WTO for regulations:


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1. Measures should not discriminate between countries and between domestic and foreign

producers;

2. Measures should be transparent so that all parties have access to the information;

3. Measures should be based on a scientific basis in the case of SPS measures;

4. There is no less trade‐disturbing alternative. Governments should use regulations that are not

more trade and investment restrictive than necessary to fulfill the legitimate public policy

objectives. This requires careful assessment of the impact of regulations so that in neither

design nor implementation do they create unjustified difficulties for the free flow of goods,

services and investment.

State trading enterprises (STE) may also be used as a vehicle for implementing a number of trade policy

measures which are not consistent with WTO provisions. The most common is a violation of market

access obligations. For example, an STE might be used to provide protection for the domestic market in

a given product by setting resale prices of imports at very high levels, thus negating tariff concessions

bound in WTO Schedules. The provision of subsidies to STEs which are mainly involved in exporting may

run afoul of export subsidy disciplines. Even in cases where the objective of the government acting

through the STE is not intentionally trade‐distorting, the STEs’ operations may nevertheless distort

trade. For example, the protection of public health, which is a frequently stated rationale for the

maintenance of monopolies on alcohol and alcoholic beverages, may seriously distort trade in those

products. It is only when the activities of the STE can be examined that their impact on trade can be

analyzed and, ultimately, more effective rules developed. WTO provisions seek to make the STEs behave

as private competitive traders, and thus to remove the potential for trade distortion offered by

government involvement in an enterprise's decisions and activities.

Export restrictions

Some government may impose export taxes on exported goods. This is most commonly done with

unprocessed products, with one or both of the following aims: 1) to maintain a large supply of a product

(particularly a staple food crop) in the country in order to control price escalation; and 2) to promote

increased value addition within the country (e.g. for food products, wood, minerals, etc.). Export

restrictions take various forms such as prominently export duties, but also quantitative restrictions, and

licensing requirements. While quantitative export restrictions are in principle prohibited by WTO rules,

there is no substantive discipline on export duties, only efforts to revise this at the multilateral and

bilateral levels. A recent OECD study shows that the number of countries applying export duties over the

period 2003‐2009 has increased compared to previous years, and that such duties were introduced

primarily by developing and least developed countries (Jeonghoi, 2010).

When designing export restrictions, several factors should be carefully considered: (1) whether the

measures are effective in achieving intended policy objectives; (2) whether the benefit of the measures

outweighs the cost (not only in the target sector, but also its impact on other sectors in the economy);

and (3) whether the measures achieve the objectives in the least trade distorting ways. Some

governments responded to high food prices in 2007/08 with an increase in the international price of a

commodity to limit inflationary pressures. An export restriction, by increasing domestic supply, reduces


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the domestic price of the product, thus partially offsetting the inflationary pressures coming from higher

prices abroad. However, such measures prevent exporters to benefit from high international prices.

Also, when applied by large countries that can influence world prices can have a negative impact on the

welfare of trading partners, especially those of small countries, by reducing the supply to the world

market and thus amplifying the negative aspects of the initial high price. At least for the aim of

addressing inflation in food prices, some governments have responded with more trade‐friendly policy

options such as reducing or suspending import tariffs on food products; another response has been

targeted cash transfers to vulnerable groups. For promoting value addition, more trade‐friendly policies

include positive incentives – for example measures to promote targeted investment, including

subsidized credit and accelerated depreciation – for investment in downstream sectors.

Exchange rate

The nominal exchange rate is the price of one currency expressed in terms of another, and is crucial to

exporters. When the exchange rate rises, goods priced in local currency become more expensive in

foreign currency ‐ so demand for these dearer exports drops, reducing overall demand. Imports become

cheaper in local currency, putting downward pressure on inflation and interest rates. Conversely, a

lower exchange rate typically boosts export demand, and increase the cost of imports, putting upward

pressure on inflation and interest rates.

The Real Exchange Rate (RER) can be expressed as the nominal exchange rate relative the price of

nontradables. Being the relative price of non‐traded goods, it cannot be controlled by policy makers

directly. Rather, it is the outcome of other policies and processes influencing supply and demand.

There has been strong advocacy in favor of consciously maintaining under‐valued exchange rates in

developing countries intent on boosting exports. Rodrik (2008) articulates two stories, where real

exchange depreciations serve to expand the tradable sector. In one, tradables are special because they

suffer disproportionately from the institutional weakness and contracting incompleteness that

characterize low‐income environments. In the other, tradable are special because they suffer

disproportionately from the market failures (information and coordination externalities) that block

structural transformation and economic diversification. In both cases, an increase in the relative price of

tradable acts as a second‐best mechanism. Indeed, Rodrik (2008) shows that growth over the medium

term is much higher in countries with more undervalued exchange rates. This result is confirmed by Berg

and Miao (2010), and implicitly suggested by Freund and Pierola (2009), who find that a change in

relative prices due to a real exchange rate depreciation leads to entry in new export industries and the

discovery of new markets.

An important caveat regarding the use of the exchange rate as a policy instrument to boost exports and

growth is that it suffers from a fallacy of composition – i.e. the tool would be ineffective if many

developing countries were to employ it, due to competition among them. It would also hurt both

domestic consumption and export‐oriented industries with high import content. Thus, undervaluation

should be considered only for small countries, at an early stage of development, with stagnant export

growth, in need of getting more resources into the tradable sector (Freund and Pierola 2009).


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Foreign investment policy

Investment policy includes the various laws and regulations that determine if and how a foreign entity

may invest in firms, infrastructure, or other economic activities in the country. At the heart of FDI policy

is the existence of restrictions or regulations on the nature or level of investment in certain sectors or in

certain types of firms – this might include for example, the requirement for some local shareholding or

even majority local holding in any investment (or it might bar FDI completely in certain sectors). Beyond

this, foreign investors can face restrictions to investment through:

Limitations or caps on the availability of licenses or concessions in certain sectors

Laws related to mergers and acquisitions

Foreign exchange laws, which may make it practically difficult to operate

Regulations and processes involved in company registration

Other industry‐specific regulations.

FDI openness varies considerably across sectors, with services sectors – particularly the critical input

services like telecommunications, energy, and transport – often most restrictive in terms of FDI access.

Box 2B.9: Investing Across Borders – reviewing good practices

Most research and empirical evidence finds that, on balance, FDI helps foster development in recipient economies (Nair‐Reichert & Weinhold, 2001). These benefits are particularly increased in countries with good governance, well functioning institutions, and transparent, predicable legal environment. Foreign investors and governments concerned about the competitiveness of their economy’s business environment have a broad range of resources at their disposal. The most recent is the publication of “Investment Across Borders” by the World Bank with up‐to‐date indicators that measure FDI regulation in four specific policy areas: i) investing across sectors, ii) starting a foreign business, iii) accessing industrial land, and iv) arbitrating commercial disputes. Countries can improve their FDI competitiveness by looking for lessons and good practices of other countries that scored well on Investing Across Borders indicators, summarized as follows: Investing Across Sectors

Allowing foreign ownership in the primary, manufacturing, and services sectors. The global trend has been to liberalize a growing range of economic sectors. In many countries the benefits of openness to foreign capital participation have overcome the reasons for restricting certain sectors from foreign ownership.

Starting a Foreign Business

Equal treatment of foreign and domestic investors. The start‐up process should be governed by the same rules for all companies regardless of their ownership. Any differences in treatment should be due to companies’ size, legal form, or commercial activity –not the nationality of its shareholders.

Simple and transparent establishment process. Countries should consolidate start‐up procedures and abolish unnecessary ones (i.e. investment approvals for small projects). In addition, countries can enable investors to register business online. Fast track alternatives, even if they entail higher processing fees, are also usually valuable to foreign investors. Countries should not require foreign companies to go through a local third party (lawyer, notary, public entity).


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Accessing Industrial Land40

Clear laws providing fair and equal treatment for foreign and domestic companies. Law should provide security to investors –foreign and domestic‐ so that they feel comfortable operating and expanding their businesses, and should not limit their ability to develop, renew, transfer, mortgage or sublease land.

Accessible land information and efficient acquisition procedures. Law records should be up‐to‐date, centralized, integrated, easily accessible, and provide information useful to investors and the general public. There should be clear rules for acquiring private and public land; avoiding unnecessary and cumbersome procedures.

Arbitrating Commercial Disputes

Strong arbitration laws in line with arbitration practice. Ideally, arbitration laws should be consolidated in one law or a chapter in civil code and are coherent, up‐to‐date, and easily accessible. A strong legal framework should be associated with effective arbitration practices and greater awareness of the benefits of arbitration.

Autonomy to tailor arbitration proceedings. Good arbitration regimes provide a flexible choice for commercial dispute resolution.

Supportive local courts. There should be strong support from local courts for arbitration proceedings and consistent, efficient enforcement of arbitration awards.

Adherence to international conventions. Adherence to and implementation of international and regional conventions on arbitration such as the New York Convention and the ICSID Convention signal a government’s commitment to the rule of law and the protection of investor rights.

Source: World Bank‐IFC; “Investing Across Borders 2010: Indicators of Foreign Direct Investment Regulation in 87 Economies”.

40 This is addressed in the section of the Toolkit on Intermediate Inputs and Backbone Services


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Incentive Framework: Domestic Policies and Institutions (Competition, Business Environment and Governance)

Note to the Practitioner: Business environment and governance issues have a fundamental impact on competitiveness well beyond export markets. These issues are also covered in quite significant detail in many other analytical products from the Bank (e.g. Doing Business, ICAs). As such, it is not expected that there should be a requirement for an in‐depth analysis of the Business Environment and Governance as part of the Trade Competitiveness Diagnostic. Rather, a summary of key issues can be drawn from existing research in most countries. There may be some need to qualify specific impacts in some key sectors and to understand how these factors impact the decisions of exporters, but only limited field research should be required.



Main components of domestic policies and institutions




Quality Market

penetration

Competition

Business environment & governance


Measures Sources

Busin

ess re

gulato

ry enviro

nment

Starting a Business

Number of procedures to start a business. DB

Cost of complying with procedures DB

Time (number of days) to complete the procedures DB

Closing a Business

Time (number of days) to complete a bankruptcy DB

Cost of bankruptcy proceedings as percentage of estate’s value DB

Recovery rate for claimants through bankruptcy proceedings DB

Dealing with licenses

Number of procedures to build a standardized warehouse DB

Median duration (number of days) to complete a procedure DB

Cost to complete procedure as a % of the country’s income per capita

DB

Registering Property

Number of procedures to transfer the property title from a seller to the buyer

DB

Time (number of days) to complete the procedures DB

Cost as a % of the property value DB

Protecting Investors

Transparency of transactions (extent of disclosure index) DB

Liability for self‐dealing (extent of director liability index) DB

Shareholder’s ability to sue officers and directors for misconduct (ease of shareholder suits index)

DB


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Sources for Cross‐Country Indicators of the Business Environment World Competitiveness Yearbook • Published by the Institute for Management Development in Lausanne. Until 1996, a joint publication with

the World Economic Forum. Analyzes the international competitiveness of 49 countries, on the basis of hard data from international organizations and perception surveys of enterprise managers.

• Hard data cover economic performance, international trade and investment, public finance and fiscal policy, education, productivity, and infrastructure quality. Survey questions cover institutional framework (government efficiency, justice, and security), business legislation (openness, competition regulations, labor regulations, and capital market regulations) and management practices. Source: www.imd.ch

Degree of protection of property rights and intellectual property GCI

Enforcing Contracts

Number of procedures to resolve a commercial dispute DB

Time (number of days) to resolve a commercial dispute DB

Cost (as percentage of the claim) to resolve a commercial dispute DB

Lack of confidence courts uphold property rights (% of firms) ICS

Taxation

Paying Taxes Effective corporate tax rate WDI

Total tax rate (%) WDI

Administrative burden of paying taxes (number of taxes, agencies involved, methods for payment, frequency)

DB

Time (in hours per year) to prepare, file and pay taxes DB

Management time dealing with officials (% of management time) ICS

Competitio

n

Competition Intensity of domestic market competition GCI

Extent of market dominance (rating) GCI

Effectiveness of anti‐monopoly policy (rating) GCI

Services and FDI

Investing Across Borders IAB

Starting a foreign business (time and procedures) IAB

Accessing Industrial Land (time to lease, strength of legal rights, availability and access to information)

IAB

Arbitrating Commercial Disputes (strength of laws, ease of process, extent of judicial assistance)

IAB

Governan

ce

Governance Number of firms paying bribes ICS

Average bribe as percentage of total sales ICS

Irregular payments in exports and imports GCI

Losses due to Crime and violence ICS; GCI

Losses due to Security issues ICS; GCI

Unpredictable interpretation of regulations ICS

Corruption perception Index Transparency

International

Degree of undue influence in the judicial system and among government officials

GCI

Government efficiency GCI


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Global Competitiveness Report • The Global Competitiveness Index, published annually by the World Economic Forum is another good

example of benchmarking. Published by the World Economic Forum since 1996. Analyzes the international competitiveness of more than 100 countries, on the basis of hard data from international organizations and perception surveys of enterprise managers.

• Survey questions cover access to credit, public institutions for contract and law enforcement, corruption, domestic competition, labor regulations, corporate governance, environmental policy, and cluster development. Hard data cover economic performance, international trade and investment, public finance and fiscal policy, education, technological innovation, information and communications technology, and infrastructure quality. Starting in 2003, the analysis includes six Doing Business indicators on starting a business and enforcing a contract. Source: www.weforum.org

Global Enabling Trade Report • Measures and analyzes institutions, policies, and services enabling trade in national economies around

the world. Includes the most current data and recent analysis of the factors enabling trade in industrialized and emerging economies, as well as the latest thinking and research from trade experts and industry practitioners. Source: www.weforum.org

Index of Economic Freedom • Published since 1995 by the Heritage Foundation and the Wall Street Journal. Analyzes economic

freedom in 161 countries and is based on assessments by in‐house experts, drawing on many public and private sources.

• The index covers 10 areas: trade policy, fiscal burden, government intervention, monetary policy, foreign investment, banking and finance, wages and prices, property rights, business regulation, and black markets. Source: www.heritage.org.

World Markets Research Center • Published since 1996 by the World Markets Research Center in London. Analyzes the investment climate

in 186 countries and based on assessments by 180 in‐house experts, drawing on many public and private sources. Source: www.worldmarketsanalysis.com.

Economic Freedom of the World • Published since 1997 by the Fraser Institute. Analyzes economic freedom in 123 countries and based on

assessments by in‐house experts, drawing on many public and private sources. The ratings on the business environment are derivative, based on the Global Competitiveness Report.

• The index covers eight areas: size of government, legal structure, security of property rights, access to sound money, freedom to exchange with foreigners, regulation of credit, regulation of labor, and other business regulation. Source: www.freetheworld.com.

Country Risk Service • Published quarterly since 1997 by The Economist Intelligence Unit. Provides international investors with

risk ratings for 100 countries and based on assessments by in‐house experts, drawing on previous ratings.• The index covers seven areas of country risk: political, economic policy, economic structure, liquidity,

currency, sovereign debt, and banking sector. Source: www.eiu.com.


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Business Environment Risk Intelligence • Published by Business Environment Risk Intelligence three times a year since 1966, in Geneva,

Switzerland. • Provides international investors with risk ratings for 50 countries. Based on assessments by in‐house

experts, drawing on previous ratings and outside experts. Their assessments are evaluated by a panel of about 100 external experts.

• The index covers two areas of country risk: political and operational. Operational risk covers the enforceability of contracts, labor costs, bureaucratic delays, short‐term credit, and long‐term loans. Source: www.beri.com.

FDI Confidence Index • Published since 1997 by A.T. Kearney in Chicago, Illinois. Provides subjective views on the attractiveness

of 60 countries for foreign investment. • Based on assessments by executive managers of 1,000 global companies. Only the aggregate index is

published. Source: www.atkearney.com.

Source: Doing Business


Interview Targets Key issues for discussion

Business regulatory environment

Ministry of Trade Ministry of Industry Ministry of Finance Ministry of Labor Local government Company registrar Other agencies responsible for issuing permits and licenses Commercial banks Investment Promotion Agency Customs

Main constraints faced by firms Constraints to set‐up v day‐to‐day operations Which issues impact importing and exporting

directly? Reform policies / programs in place or planned

Taxation Ministry of Finance Local government Agencies responsible for tax audit and collection

Structure of tax regime Any taxes or administrative issues (e.g. audits) that

keep forms informal or create anti‐export bias Tax incentives / subsidies linked to exporting

Competition Ministry of Trade Ministry of Industry Competition Authority Academia

Current competition law Nature of existing anti‐competitive behavior Existence of SOEs or state trading monopolies Structure of ownership of major input industries Cost and service implications Quality of local suppliers

Governance Ministry of Trade Ministry of Industry Ministry of Finance Local government Academia

Incidence of corruption and nature (linked to government contracts v. petty and linked to registration, customs, etc.)

Other governance issues impacting investment and exporting – e.g. linked to judicial system, political processes, etc.

Private sector Domestic investors How do individual firms respond to the above


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(relevant for all issues above

Private investors Informal firms Law and accounting firms Chambers of Commerce

issues in terms of investment? in terms of important and exporting?

How do responses differ by nature and size of firms?





Competition issues may arise due to limited scale of domestic market – greater likelihood of strong links between business and government elite which contributes to competition and wider governance issues

FDI policy and business regulations likely to be critical – these countries are less able to afford weaknesses in the business and investment climate

May have limited tax base and so there may be pressure on tax instruments

May have more limited institutional capacity

Resource‐rich Historically, many resource‐rich economies face particular problems with governance issues – this may manifest itself in business regulatory issues as well as in high and lower level governance problems (e.g. corruption)

Assess how the tax and competition environment impacts the resources sector versus the non‐resources sector (potential for an environment that creates barriers to competitiveness and adjustment toward non‐resources sectors)


Important to understand how tax and regulatory environment impact labor markets

Low income countries typically face greater problems with regulatory capacity

Middle income Competition policy an important issue to assess, as many middle income countries have well‐established “national champions” in key industries

Business environment and governance issues likely to vary widely across countries


Sector Relative priorities and issues for consideration

Light manufacturing

Check on competition issues related to key inputs

Many light manufacturing sectors are targeted with special tax treatment through industrial policies – this may include lower corporate taxes for FDI (through SEZs or otherwise).

Major issues to check on business regulatory environment include procedures for establishing a business, accessing land and property, obtaining permits for construction, and setting up utilities (obtaining electrical and water connections)

Agriculture Check on competition issues including price controls and monopolies in certain parts of the value chains (especially processing and marketing)

Business regulatory issues should focus on land access, zoning, titling, registration and other processes related to land purchase and lease; issues related to Environmental Impact Assessments (EIA) should also be considered

Services Competition issues critical, particularly in key input sectors (energy, transport, telecommunications)

Regulatory restrictions regarding licensing as well as professional and educational credentials can be an important barrier


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In spite of the significant impact that business regulation has on overall export competitiveness, the

services sector may be one of the most affected by inefficient, unnecessary and restrictive regulations.

Trade in services tends to be more reliant on institutions with clear and simple rules providing regulation

and contract enforcement than trade in goods for which there markets may be more transparent and

switching costs relatively low. A sound regulatory framework is the main pillar for business in the

services sector, especially when it comes to subsectors in which large initial investments are required

such as telecommunications, transportation and financial services. Managing reforms of services

markets requires integrating trade opening with a careful combination of competition and regulation.

Governments have an important role to play in generating the preconditions for an efficient set of

service industries, giving special importance to the institutional infrastructure. Regulation is generally

motivated by a mix of efficiency and equity considerations. The challenge for policy makers is to

strengthen such regulation without making it inefficiently strong and when needed, introducing

complementary policies to ensure that the benefits of competition are widely distributed (Hoekman and

Mattoo, 2008).

Background reading: relationship between domestic policies and institutions and trade

competitiveness

The business environment plays an important role in firm‐level competitiveness in the international

context and may act as an enabler or obstacle for their growth. Factors affecting the business

environment are diverse and complex. They include a variety of transactions‐related costs41, the fiscal

environment in which firms operate, as well as institutional quality and government effectiveness. An

effective business environment should promote firm behavior that is allocatively efficient on a macro

basis over the long term (i.e. sustainable) – this requires: i) regulatory regime that is adequate to fulfill

the task of essential controls of the private sector without creating unnecessary obstacles to running a

business; ii) a non‐distortionary tax environment; iii) a legal and framework that promotes market

competition; and, iv) sound governance and capable institutions, that minimize the wedge between

policy (de jure) and practice (de facto).

The main channels through which the domestic business environment affects export competitiveness

are: 1) by introducing distortions to the microeconomic incentives of companies, which ultimately affect

their decisions on producing and exporting; and 2) by raising both fixed and variable costs for firms.

Although there is no doubt that macro policies are important, there is a growing consensus that the

quality of business regulations and the institutions that enforce it are major determinants of prosperity.

Macro‐incentives that contribute to the soundness and stability of an economy create opportunities for

prosperity, but actual wealth creation occurs through the productivity of firms that combine available

resources in the production process. Constraints to entry and exit a business, the regulatory burden, the

time and cost of getting licenses and permits, the costs of enforcing contracts, and others, help shape

41 This includes costs related to setting up a business and remaining in compliance with legal and regulatory frameworks (discussed in this chapter) but also infrastructure, transport and trade facilitation costs (covered separately as its own chapter in this toolkit)


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firm‐level competitiveness by influencing the microeconomic flexibility of a country. (World Economic

Forum 2007; Porter 1998, World Bank, 2004).

Business regulation may constitute an obstacle for improving firms’ competitiveness at the micro level,

reducing the options for companies to successfully compete in international markets. Businesses in less

developed countries normally face heavier administrative costs, more regulatory procedures and longer

processing times. The regulatory burden is often more costly as the size of the company decreases,

constituting a major impediment to start a new business. While the effect of ineffective business

regulation on business is a decreased ability to assert legal or economic rights, the effect on the

government side is a structural obstacle for expanding the tax base and generating greater revenue.

A dynamic private sector – with companies engaging in investments, creating jobs, and improving

productivity – promotes growth and expands opportunities for international trade. The process by which

an economy upgrades and productivity grows works through a series of enablers, which also serve as

intermediate indicators of competitiveness. True competitiveness is measured by productivity.

Productivity ultimately depends on the microeconomic capability of the economy, rooted in the

sophistication of companies (both local and foreign), the quality of the national business environment,

and the externalities arising from the presence of clusters related and supporting industries (Porter,

1998). In a study conducted to investigate the linkages between business regulation and macro and

microeconomic outcomes, Loayza and Serven (2010) found evidence that some types of regulations

have negative effects on labor productivity growth, while others have positive impact. Product market

regulations and Labor regulations fall under the first group. The main connecting link that explains this

adverse effect is firm turnover – in countries where labor and product market regulations are more

burdensome, turnover rates are lower on average. The authors found, however, that a third type of

regulation – level of taxation – has a positive effect on productivity growth, a result explained by them

as associated with the higher supply of productive public services permitted by higher taxation.

Conversely, an inefficient business environment and burdensome regulations create distortions and

discourage firms from competing in the market. Thus, improvements to the existing business regulation

can contribute to firms’ competitiveness by facilitating procedures and diminishing associated costs

(World Economic Forum, 2007).

Main components of business environment and governance analysis

Governance

Countries are not endowed with the institutions that make up their economic environments, but rather

this is determined endogenously. Policy makers play an important role in shaping future developments

on competitiveness. One important component of understanding the micro‐incentives in the business

environment that shape firm decision making is the governance perspective and the role of the

government in protecting against private diversion. This includes such factors as the rule of law,

bureaucratic quality, corruption, the risk of expropriation by the state, and the enforcement of contracts

(Hall and Jones, 1998). These meta‐institutions are considered fundamental for a country’s

competitiveness and economic growth, well beyond simply the export sector. The institutional

framework provides the fundamental preconditions for private companies, government and individuals


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to interact to produce goods and services in the economy. Owners of land, other physical assets, and

intellectual property will invest in the improvement and upkeep of their property only if their rights as

owners are not guaranteed. In the same sense, if property cannot be bought and sold with the

confidence that the authorities will uphold and enforce the transaction, the market will lack incentives

for growth. The result will essentially be an increase in the perceived risk premium of investment, and

thus restricted firm entry and reduced investment in innovative activities. This will particularly be the

case in smaller markets and in sectors where the potential rent earnings are limited (i.e. governance is

likely to impact trade and investment more in places like Swaziland and Mongolia, than China and

Russia). Analysis of the impact of institutions and governance on export competitiveness may focus on

observable channels through which it may impact firm behavior, for example through understanding FDI

perceptions. At a more micro level, governance impacts on trade competitiveness can be analyzed

through firm perceptions of corruption, trade‐related transactions (e.g. licensing, importing and

exporting).

Business regulations

In terms of export competitiveness, extensive compliance requirement associated with government

regulatory procedures such as paying taxes, getting licenses, or dealing with custom procedures for

trading across borders can be detrimental for firms’ competitiveness in international markets. In the

services sector, more sophisticated regulations on financial and banking services, and specialized

delivery services such as telecommunications and transportation, as well as special provisions on foreign

direct investment and professional licensing and qualification requirements may constitute significant

obstacles for growth and competitiveness.

Excess regulations may add extra costs for regular firms in terms of time and money. Heavier regulation

is generally associated with greater inefficiency of public institutions and more corruption, but not with

better quality of private or public goods. Frequently, countries that regulate the most have the least

enforcement capacity and the fewest checks and balances to ensure that regulatory discretion is not

used for private gains. Bad institutions – for example those involving cumbersome entry procedures,

rigid employment laws, weak creditor rights, inefficient courts, and overly complex bankruptcy laws –

simply do not get used.

A large part of the business environment is determined by business regulations affecting a company

through its different stages of development – i.e. from starting the business, hiring and firing workers to

paying taxes, dealing with customs and complying with licenses and permits requirements.

Taxation

While taxation is clearly necessary in all countries, it can have a negative impact on export

competitiveness by effectively raising the costs at which firms must sell in export markets. While

excessive tax rates (e.g. Sweden’s notorious former 98% marginal tax bracket) create clear disincentives

for individuals and firms, in most cases the issue is not the rate of the tax per se but rather the way in


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which it is applied and the distorting effects it may have on firm behavior, for example creating a

disincentive to invest42 or giving an incentive to invest in capital over labor (or vice versa). For large

multinationals, the corporate tax rates – which are often the headline figure used in discussions over the

competitiveness of tax regimes – matter little, as they make use of transfer pricing, double taxation

treaties, and other instruments to minimize their tax burden in any one country. On the other hand,

Loayza and Serven (2010) found that the level of taxation (what they call fiscal regulation) is positively

correlated with GDP growth.

Perhaps more important than the level of taxes is the administrative processes involved in enforcing the

tax regime. This may include excessive red tape as well as, more onerous, inspection regimes which can

be bureaucratic at best and corrupt at worst. Understanding the basic statutory requirements,

procedures, and the transparency with which the tax regime is administered is important to analyzing

the business environment in which firms operate.

Competition

Uncompetitive business practices deter domestic firms’ export competitiveness as well, in particular

practices affecting market access for imports such as domestic import cartel or monopolies, exclusionary

abuses of a dominant position, control over importation facilities, vertical market restraints that

foreclose markets to foreign competitors, certain private standard‐setting activities and other anti‐

competitive practices of industry associations. By contrast, robust competition in the home market

contributes positively to the international competitiveness of firms by: i) driving prices toward marginal

costs; ii) ensuring that firms produce at the lowest attainable costs; and (iii) providing incentives for

firms to innovate and introduce new products and production methods into the marketplace.

A transparent and effective competition policy can be an important factor both in enhancing the

attractiveness of an economy to foreign investment, and in maximizing the benefits of such investment.

More specifically, competition policy can enhance the attractiveness of an economy for foreign

investment by providing a transparent and principles‐based mechanism for the resolution of disputes

that is consistent with international norms that are widely‐accepted internationally. This increases

investor confidence and therefore the propensity to invest. Vigorous competition in markets, reinforced

by competition policy, also helps to maximize the benefits of such investment to host countries, by

encouraging participating firms to construct state‐of‐the‐art production facilities, to transfer up‐to‐date

technology into host countries and to undertake appropriate training programs. FDI liberalization can

help to enhance the contestability of markets, which can provide an important stimulus for greater

efficiency; it is not a sufficient condition to achieve this result. Rather, effective competition laws,

policies and enforcement machinery are necessary to ensure that pre‐existing statutory obstacles to

contestability are not replaced by anti‐competitive practices of firms, thus negating the benefits that

could arise from liberalization.

42 For example, if reinvested profits are taxed in the same way as profits distributed as dividends.


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Box 2B.10: Maximizing the Benefits of Regulatory Reform – factors for success

Benefits International evidence shows that efficient and transparent regulations have a positive impact at macro and micro levels:

• Economic growth. Regulatory reform has been estimated to increase the level of real GDP in several OECD countries, ranging from 1% in the US to 5 and 5.5% in Japan, Germany and France.

• Export competitiveness, supported by efficient trade liberalization reform, transformed Hungary and Mexico from inward‐looking to successful export‐oriented economies.

• Investment, both domestic and foreign, responds positively to an effective regulatory framework that provides credibility and certainty to the private sector. South Korea’s FDI inflow increase resulting from regulatory reform was estimated at US$36.5 billion between 1999 and 2003. Trade growth in Hungary was accompanied by a dramatic increase in FDI – during the reform decade Hungary attracted over one‐third of all FDI in Central and Eastern Europe.

• Expansion of private sector activities. The contribution of the Mexican and Hungarian private sector to the GDP reached nearly 90% and 85% respectively by the end of the 1990s, higher than the ratio for many OECD countries.

• Increased labor productivity. A study concludes that economic deregulation in five sectors increased labor productivity in OECD countries ranging from 0.5% in the US to 3.5% in Germany.

• Enhanced competition. The opening of port operations to multiple parties in Uruguay increased firm productivity by 300%. In Chile, deregulation of entry into the long‐distance telephone market cut rates by 50%.

• Reduced business costs. Inefficient regulation in port operation contributed to implicit tariffs of 5 to 15% on all Latin America exports6. A survey highlights that managers spent between 10 and 30% of their time managing process regulation, incurring costs in the range of 5 to 15%7.

• Public goals such as consumer protection and environmental quality can be reached through efficient reform.

Costs Regulatory reform can be associated with short‐term job losses and reduced government’s revenues, though evidence shows mixed results:

• Short‐term employment losses can occur in sectors with low levels of productivity and efficiency. However, there is evidence that early job losses can be compensated in the longer run as reforms breed entrepreneurialism and formal employment. In South Korea the 1998 deregulation was estimated to create more than one million new jobs between 1999 and 20038.

• Reduced government revenues can occur when reform targets regulations created for revenue purposes (e.g. some business licenses). Yet evidence shows that reform aiming at streamlining licenses, eliminating those that are unnecessary or redundant, can have a pull effect on potential new users – e.g. informal firms – hence increasing the coverage of the revenue base.

Factors for successful reform Countries have taken different approaches to regulatory reform based on their intrinsic economic, social and institutional structures. There are however underlying factors that have contributed to reform success in most countries:

• A supportive macro‐economic environment. In an unstable economic environment it is rather unlikely that the government will prioritize regulatory reform over macroeconomic stability. Political will has been vital to the success of regulatory reform in Hungary and Mexico.

• Adapting best practices to local conditions. In Hungary international models were adapted using the existing legal and administrative frameworks to implement change.


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• Creating an independent dedicated reform agency. Ideally comprised of influential, skilled technocrats with direct access to the highest levels of policy making, this agency should have the authority to promote regulatory reform, to monitor progress, and to assess the quality and quantity of regulations using cost‐benefit and cost‐effectiveness principles. In South Korea the Regulatory Reform Commission (RRC) was created to maintain a consistent set of principles to control regulatory quality. In Mexico the government created executive units in key ministries to overcome entrenched resistance to reform.

• Designing and implementing compensation mechanisms. Getting the support of interest groups opposed to reform may require a good mix of mechanisms such as compensatory resources for short‐term losses, training for rapid relocation in the market place, and prior involvement of labor groups in the design of the reform process. Mexico is a good example of the efficient use of specific adjustment programs during privatization and trade liberalization, though fiscally expensive.

• Building effective regulatory structures. Regulations can be changed in a relative short period of time, but strengthening the regulatory institutions that implement reform and monitor the quality of regulations needs more time and requires the government’s continuous support.

• Cost‐benefit analysis and monitoring. As each individual regulation has a cost‐benefit balance, a government should be able to know the expected costs and benefits of its actions.

Source: World Bank, 2009. “Lessons for Reformers: How to launch, implement, and sustain regulatory reform”.

Box 2B.11: Doing Business Data and Enterprise Surveys – facts and shortcomings

DOING BUSINESS43

Benchmarking exercises provide a useful and straightforward way to address competitiveness issues. Examples of these exercises are provided by the World Bank Group’s Doing Business indicators, which benchmark and rank the cost and quality of business regulations for key cross‐cutting investment climate issues. The Doing Business indicators use available information on 175 countries and measure the cost of doing business for a hypothetical firm on an annual basis. The two type of indicators in Doing Business focus on government regulations and its effect on business –especially on small and medium size domestic businesses. The information contains measures of actual regulation, i.e. number of procedures to register a business or an index of employment law rigidity, and also measures on regulatory outcomes, i.e. time and cost to register a business, enforce a contract or go through bankruptcy. Frequent observations based on a standard firm description can be extremely useful for monitoring progress in the areas covered under the indicators (i.e. costs of starting and closing a business, employing workers, trading across borders, registering property and getting credit, dealing with licenses, and paying taxes; investor protection issues; and contract enforcement) as well as for making cross‐country comparisons. However, the Doing Business data do not allow the productivity effects of the cross‐firm, within country variation in investment climate conditions to be studied (Alaimo, Fajnzylber, et.al, 2009). The main shortcoming with this approach is that it is not enough to know a country’s ranking. Rankings are no substitute to a careful evaluation of impact and may be misleading sometimes, as they tend to give equal importance to factors that may influence quite differently firm’s performance and growth. For this reason, benchmarking exercises should be seen as complementary to other approaches that try to assess the relative importance of reforms to the selected outcome, be it growth or competitiveness.

43 The methodology, surveys and data can be found in http://www.doingbusiness.org .


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ENTERPRISE SURVEYS (ES)

The enterprise surveys collect hard data and perceptions data at the firm level. Firm‐level data allow measurement of some dimensions of the business and investment climate for which limited data sources exist at the aggregate level –notably for indicators of the quality of governance and institutions and, in particular, for measures of the incidence of corruption or regulatory burdens. In addition, microeconomic data allows for the possibility of comparing for the different effects and constraints that investment climate conditions have within countries among different type of firms. The idea of directly asking firms about the various aspects of the business environment that affect their performance is the underlying premise of the enterprise surveys prepared by the International Finance Corporation (IFC) and the World Bank, currently known as Investment Climate Surveys (ICS). The latter cover 105 countries, more than 76,000firms and dozens of indicators on the quality of the business environment. The surveys capture entrepreneurs’ perceptions about the different obstacles affecting firms’ competitiveness and allow comparing these perceptions with hard data on business environment and firm performance. Business surveys are a direct way of identifying competitiveness constraints. The World Bank ICS include a standard question on what are the main obstacles for growth of firms. Businessmen are asked to evaluate the severity of some twenty potential obstacles to growth of their businesses. A five‐point scale is used, ranging from extremely severe to not important. These results can be compared across more than 100 countries and can be compared over time as well. This approach provides valuable information on the priorities that entrepreneurs would adopt if faced with the task of designing policies to improve the investment climate. In many countries, business associations also survey firms frequently. However, there are three main limitations with this approach: first, perceptions of the entrepreneurs are volatile and may be biased by recent events reported in the media, and they may also reflect their specific cultural and socioeconomic background. For instance, managers of firms that concentrate on local as opposed to national or international markets may lack the necessary benchmarks to judge the severity of the problems existing in their cities or provinces, and compare them to national or international best practices. Second, the questions tend to focus on obstacles and problems, leaving aside factors that enable growth, such as technology and innovation. Third, they tend to overestimate the impact of factors whose costs are borne privately and benefits for the economy are more diffused – taxes are perhaps the best example.44 Other examples of this type of data include the competitiveness indicators of the World Economic Forum (WEF) as well as the governance measures collected by Asian Development Bank Institute’s International Country Risk guide (ICRG) and A.T.Kearney, in its FDI Confidence Index or Transparency International (World Bank, 2004; Alaimo, Fajnzylber et. al, 2009).

44 Another oft‐cited shortcoming is the fact that these surveys do not cover firms that have not entered the market. This limits their effectiveness to identify barriers to competition. This can be in principle, addressed by the survey sample design.


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Factor Conditions: Access to Finance



Main components of access to finance




Quality Market

penetration

Access to investment capital

Access to working capital

Trade finance services


Measures Sources

General and investment capital

Cost of capital (average of last 5 years) IMF

% of firms indicating access to finance as a major constraint

Enterprise Surveys

% of firms obtaining bank credit Enterprise Surveys

Average interest on bank loan and credit line Enterprise Surveys

Average collateral requirement (as % of loan) Enterprise Surveys

Working capital Average interest on working capital loans Country‐specific

Availability of factoring services Country‐specific

Trade Finance Average cost of confirmed letter of credit (% rate) Country‐specific

Average cost of export credit insurance (% rate) Country‐specific

Total export value (US$/capita) that can be

supported by ECGA fund

Country‐specific

Share of commercial risk covered by ECGA Country‐specific


Interview targets Key issues for discussion

Government Ministry of Trade and Industry Ministry of Finance Development Banks Export finance institutions (e.g. export

credit guarantee agency) Export Promotion Agency Private sector Individual exporters (small / new and

established)‐ across traditional and emerging sectors

Export councils or industry associations Banks and other financial institutions Legal / accounting firms (or

professional association)

Main sources of finance for exporters What restrictions are there on access to capital / what are

the main reasons that firms do not take out bank loans? Cost of loans, terms, and collateral requirements What trade finance support is provided to exporters – letters

of credit? Guarantees? Subsidized insurance? Subsidized loans for export‐related projects? factoring?

Any specific support related to smaller / new exporters? What are the main areas where additional support would

facilitate exports? Do most exporters make use of bank‐financing for

exporters? Do exporters make use of the above services? – what are

the barriers to greater take‐up?


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No specific issues inherent to being small and remote

Resource‐rich Dutch Disease effects may raise the nominal and relative cost of capital for many non‐resources export activities


Cost of finance often high and collateral requirements excessive

Working capital a major constraints for export entry and survival

Middle income Trade finance likely to be a particularly important factor determining export entry and survival

More sophisticated products like factoring and insurance likely to be well established


Sector Priorities and issues for consideration

Light manufacturing

Working capital and trade finance more important for SMEs and firms operating outside global value chains (otherwise should be able to access credit within the supply chain)

Agriculture High volume, low margin commodity agricultural trade reliant on trade finance

Some countries will have specific programs for agricultural exports

Tourism Access to finance, particularly for local and smaller‐scale tourist sectors

Business and IT Services

No specific issues other than SME nature of most firms in these sectors

Background reading: relationship between access to finance and trade competitiveness

Finally, one of the most important inputs to the production process is capital itself – i.e. access and cost

of finance to fund investments and working capital. As is well documented through many ICAs, access to

finance is almost always identified as one of the biggest barriers facing firms. Access to finance is a

bigger constraint for certain types of firms. Of course, small firms tend to be most constrained in

accessing finance. But access to finance is also a particular challenge to firms (of all sizes) that have low

levels of asset tangibility (Rajan and Zingales, 1998) – i.e. firms that have limited physical assets that can

be used as a basis of collateral. One example of this is firms in the services sector; but even in

manufacturing exporters in the apparel sector, for instance, tend to have relatively few assets relative to

the size of their working capital requirements. Finally, exporters operating within global value chains

tend to have better access to finance than firms that are disconnected from such global networks, as

credit is typically extended across the supply chain. The downside for these exporters is that liquidity

shocks such as in the recent global financial crisis can transmit quickly across these production networks,

drying up the exporters’ sources of trade credit.

While many firms face challenges accessing capital, in most cases it is not access itself but the terms of

loans that are available (e.g. often only short‐term credit is made available) and the cost of loans. Two


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main issues related to cost are most important: i) the actual interest rate charged; and ii) the collateral

requirements. On the former, high interest rates mean that only prospective investments with

particularly high return expectations and relatively limited riskiness will be considered “feasible”. On the

latter, high collateral requirements make it virtually impossible for smaller firms to qualify for credit.

The implication of lack of access or high cost of finance on export competitiveness is significant. First,

lack of access to finance to fund working capital may be a barrier to participation in export markets,

particularly given the greater risks and often longer payment terms involved in exporting. Second, lack

of access to affordable finance will mean that producers fail to undertake investments that will improve

productivity or that they substitute variable costs (like labor) for capital, resulting in non‐optimal

production structures.

Trade finance mechanisms exist to support two fundamental aspects of the trading process: risk

mitigation (i.e. insuring against the risk of non‐delivery or non‐payment by one party) and liquidity (i.e.

bridging the gap between incurring liabilities for export‐oriented production, and receiving payment

from the customer). Some 80 to 90 percent of all international trade transactions are said to be financed

by some form of trade credit (Auboin, 2009). The provision of trade finance support lowers risks for

exporters and so is particularly important during initial stages of exporting (at the extensive margin –

new products / new markets) as well as during periods of macroeconomic uncertainty. Lower risk

overcomes barriers to entering and sustaining exports (increasing export survival) as well as lowering

trade cost (through financing costs).

The case for government intervention in the provision or support of trade finance stems from unique

aspects of trade finance that may imply greater potential risk. The most obvious is its exclusively

international context, which tends to increase both macro‐level risks (e.g., exchange rate fluctuations,

changes to policy, conflict, political upheaval) and counterparty risk, linked to the greater difficulty of

enforcement across borders (Menichini, 2009). Weak cross‐border enforcement raises the risk of

strategic default on the part of suppliers which, combined with information asymmetries, creates a

problem of “credible commitment” across borders (Ellingsen & Vlachos, 2009). Finally, the cross‐border

nature of trade financing means that data on which to assess counterparty credit risk is often limited or

non‐existent (e.g., where there limited public credit registry coverage or public access to accounts or

court proceedings).

The vast majority of trade finance involves credit extended bilaterally between firms in a supply chain or

between different units of individual firms.45 Banks also play a central role in facilitating trade, both

through the provision of finance and bonding facilities and through the establishment and management

of payment mechanisms such as telegraphic transfers and documentary letters of credit (L/Cs). Amongst

45 According to messaging data from SWIFT, approximately 90 percent of trade finance occurs through inter‐firm, ‘open‐account’ exchange. Estimates from FImetrix (2009) suggest that 10‐20 percent of trade finance is composed of cash‐in‐advance payments (these mainly involve SME buyers, and inordinately in developing countries); 45‐80 percent is on open account (of which 30‐40 percent is intra‐firm), and 10‐35 percent is bank intermediated.


135

the intermediated trade finance products, the most commonly used for financing transactions are L/Cs,

whereby the importer and exporter essentially entrust the exchange process (i.e., payment against

agreed delivery) to their respective banks in order to mitigate counterparty risk. Complementing the

activities of the banks are: export credit agencies (ECAs), which guarantee and insure domestic

exporters; private insurers, which provide trade credit insurance, political risk insurance, and bonding

facilities; and multilateral development banks (MDBs), which operate formal trade facilitation programs

designed to support banks by mitigating risks in new or challenging markets where trade lines may be

constrained.

Assessing the effectiveness of trade finance support in developing countries relies in part on

understanding the provision of credit in general, and or key trade finance products in particular, through

commercial banks. A number of surveys have been conducted in recent years (c.f. ICC, 2009; Malouche,

2009), particularly to assess the perceived constraints in the provision of trade credit during and

following the global economic crisis of 2009 (see Box 2B.12)

Box 2B.12: Financing trade in a post‐crisis world

By providing liquidity and security to facilitate the movement of goods and services, trade finance lies at the heart of the global trading system. Indeed, as Auboin (2009) notes, trade finance has become ever more critical as global supply chains have increasingly integrated in recent years. During the recent global crisis, the availability trade finance was seen to have been substantially reduced, particularly for SMEs and in developing countries. This acted as a further constraint to trade and became yet another source of contagion that reverberated down supply chains to exacerbate prolong the crisis. Although governments and multilateral institutions responded aggressively to stave off the trade finance “gap” – involving the provision of up to US$250 billion in support – evidence from past crises indicates that trade finance may continue to be a problem. For example, in a study of the Asian Financial Crisis, Love, Preve, & Sarria‐Allende (2007) find that the total amount of credit provided collapses in the aftermath of a crisis and continues to contract for several years. This is because trade credit is generally a complement rather than an alternative to bank credit. When firms are constrained in their access to bank credit, they tend to reduce the amount of credit they extend in the supply chain; when they are flush with bank credit, they extend more trade. This highlights the potential vulnerability of trade finance in a post‐crisis world. If banks continue to limit lending (exacerbated by regulatory requirements like Basel II), the integrated nature of global production networks means these credit constraints are likely to amplify across supply chains. Proactive responses by governments to promote not only the provision of trade finance but also wider credit facilities, particularly for SMEs, will be critical to supporting the competitiveness of the export sector.

Source: Farole and Reis (2010)


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Factor Conditions: Labor Markets, Skills, and Technical Efficiency



Main components of labor markets, skills, and technical efficiency




Quality Market

penetration

Labor regulations and skills



Indicators Sources

Productivity – top line measures

Total factor productivity (TFP) Derived from Enterprise Surveys, national sources derived from Labor Force Surveys and Enterprise Census)

Labor Productivity Conference Board database, ILO KILM Database, national sources (as above)

Unit labor cost Derived from Enterprise Surveys, national sources (as above)

Labor markets Average wages per category of employee Country‐specific data

Wages and earnings ILO; CEIC Data46

Firing costs

Doing Business, Enterprise Surveys

Hiring costs Doing Business, Enterprise Surveys

Payroll taxes ILO

Rigidity Index Doing Business

% of workers unionized ILO, Enterprise Surveys

Strikes and work stoppages (annual average) ILO KILM Database

Share of workers in the informal sector ILO KILM Database

Labor skills % Skilled labor Enterprise Surveys

Educational attainment of workers ILO KILM Database

% of firms offering formal training Enterprise Surveys

Avg. % of workforce receiving formal training Enterprise Surveys


Capacity utilization Enterprise Surveys

Share of firms having introduced new technologies Enterprise Surveys

Share of firms using technology licensed from a foreign company

Enterprise Surveys

Share of firms with ISO certification Enterprise Surveys

46 Commercial database provided by CEIC Data: http://www.ceicdata.com/


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Share of firms outsourcing a major activity Enterprise Surveys

Share of firms with process of product innovations in past year

Enterprise Surveys

Average /median “highest level of education of managers”

Enterprise Surveys

Average / median years of experience managers have working in the sector

Enterprise Surveys

% of skilled technicians in the workforce (industry‐specific)

Enterprise Surveys


Interview targets

Government agencies and ministries Private sector and other institutions

Labor markets and skills

Ministry of Trade and Industry Ministry of Labor / Employment Ministry of Education

Individual exporters Export councils or industry associations Universities, other schools, training

institutions


Ministry of Trade and Industry Ministry of Labor / Employment Ministry of Education

Individual exporters Export councils or industry associations Universities, other schools, training

institutions Quality certification bodies

Key issues for discussion in interviews


Trends in labor productivity and main drivers Trends in labor market: supply and demand side issues Trends in wages – skilled v unskilled labor Labor relations issues Major concerns raised by private sector over labor market issues: wages, hiring /

firing costs, regulations, etc. Any recent labor legislation Main skills challenges and how they are being addressed What is government doing to address it What is the private sector doing Situation with vocational training / higher education


General perceptions on the quality of management / factors behind this Level of education and experience of most managers Role of local v foreign management Educational and training institutions – availability and quality of management

training Any specific programs / efforts to improve managerial technical capacity




Small (population) May be limited pool of skilled and managerial talent


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and remote / landlocked

General worker skills and labor productivity likely to be critical, which suggests importance of tight focus on sectors of comparative advantage

Resource‐rich Wages and other input costs may be high resulting from currency impacts of commodity exports (“Dutch Disease” effects)

Depending on market size, access to skilled workers and managers may be limited, as the best may be lured toward the dominant resources sector; understanding the dynamics of this will be important


Wage rates should be an important source of comparative advantage – if they are not (e.g. in many parts of Africa) understanding the reasons behind this (including labor market issues but also wider transactions costs) is critical

Local managerial skills may be limited – importance of openness to FDI but in having policies to ensure spillovers of knowledge

Middle income Avoiding the “middle income trap” – identifying skills and other inputs that will facilitate upgrading to services and knowledge intensive sectors



Light manufacturing

Most issues will be critical – labor market regulations, wages, skills, technical efficiency often the most critical determinants of competitiveness

Agriculture Technical efficiency critical factors – important to understand capacity / quality of extension services

Tourism Wages and skills an important issue, particularly given location of tourism facilities vis‐à‐vis labor markets

Important to assess training and skills development programs


Labor force scale can be an issue in some outsourcing sectors

Skills the most important issue – important to understand number and quality of graduates from technical universities and availability / quality of vocational training program

Background reading: relationship between labor markets, skills, and technical efficiency,

trade competitiveness

Productivity and competitiveness

At the heart of competitiveness is the productivity of firms in producing goods or services (at the

factory, farm, or office “gate”). 47 Indeed, productivity (specifically, total factor productivity) is often

equated to competitiveness – according to Porter (1990), productivity is “the only meaningful concept

of competitiveness at the national level”. There are compelling theoretical arguments and mounting

empirical evidence of the importance of productivity for the prosperity of nations. While

macroeconomic factors play an important role in creating opportunities to create wealth, the process of

47 Roughly half of cross‐country differences in per capita income and growth are driven by differences in total factor productivity, generally attributed to technological development and innovative capacity (Dollar and Wolf 1997, Hall and Jones 1999).


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wealth creation in an economy is actually tied to the increase in the productivity with which a nation

utilizes its resources to produce goods and services (Porter et al, 2008).

Recent years have seen resurgence in interest in the role of productivity. At the same time, a sharp

debate has focused on the links between productivity and trade. Trade can impact a country’s

productivity by affecting firm‐level productivity directly, or by distorting the allocation of resources

across the economy. The causality can, however, run in the other direction, from productivity to

exporting. Indeed, there is considerable research, both at the theoretical and empirical level, showing

that exporters are more productive than non‐exporters and that this productivity difference predates

any entry into exporting (Pavnick, 2002). Firm level productivity can change with trade because of many

reasons: (i) import competition, (ii) outsourcing, (iii) foreign direct investment, and (iv) integration and

access to R&D inputs. In this strand of research Roberts and Tybout (1997) develop a model of exporting

with sunk costs of entry and test it on a sample of Colombian firms. In the presence of these entry costs,

only the relatively productive firms will choose to pay the costs and enter into the foreign market. The

implied relationship between exporting and productivity is positive in a cross‐section of firms or

industries, but the causality runs from productivity to exporting. Similar results are found by Bernard

and Jensen (2004) for the US, and by Bernard and Wagner (2001) for Germany. In general, there is some

reason to believe that in lower income countries, where exporters can benefit from technology

absorption and adaptation, exporting can have significant positive spillovers to productivity. However, in

countries in which exporters are already operating at the technology frontier, the stronger causality

probably runs the other way – from productivity to exporting.

There is abundant empirical evidence suggesting that productivity is strongly associated with both the

propensity to export as well as with volumes of exports (see Escribano et al, 2010). The same can be said

about factor costs and availability, although labor skills can be considered a particularly important

ingredient for export diversification in products and markets. In particular, endowments of human

capital seem to be one of the key determinants of comparative advantage in services, an area of trade

presenting continuous expansion in recent years (c.f. Mattoo, 2009).

Box 2B.13 ‐ Channels linking trade and productivity

Bloom et al. (2009) document that Chinese import competition in the European Union led to both within firm technology upgrading, and between firm reallocation of employment towards more technologically intensive plants. In this strand of research, Cusolito (2008) shows that a reduction in trade barriers shifts firms’ incentives away from horizontal innovations and towards the introduction of vertically superior goods. The theory underlying these results is that import competition encourages firms to improve the quality of existing products and/or to create more efficient production techniques to escape from foreign competition. Arm’s length trade in intermediate inputs is another source of productivity gains. Offshoring enables a firm to relocate its relatively inefficient production process to external providers with cheaper and more efficient production capabilities. This allows the firm to turn its focus to areas where it has a comparative advantage and to expand output with the existing capacity. Evidence on this effect has been recently provided by Criscuolo and Leaver (2005), who show that there is a positive and robust impact of offshoring on productivity, both in the manufacturing and services sectors. The effect comes mainly from firms that are domestic and non‐globally engaged, i.e., do not export and are not parts of a multinational firm.


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Another channel between trade and productivity relates to foreign direct investment. Plant productivity could rise through the spillovers and linkages between foreign and local firms (Pages et al., 2010). The international exchange of goods and services opens channels of communication that facilitate the transmission of technical information. Firms in each country learn not only from the R&D projects undertaken locally, but also from the novel experiments that are carried out abroad (Grossman and Helpman, 1992). Integration also enlarges the markets in which firms operate, and by itself this effect increases the profit opportunity available from innovating. Finally, trade allows domestic firms to have access to a larger and highly qualified set of inputs needed to conduct R&D.48

Main components of analysis of productivity

A firm’s productivity depends on a wide range of factors – the two most important proximate

determinants are: (i) the costs and quality of the inputs employed in the production, especially labor and

capital, and delivering processes49, and (ii) the efficiency with which the firm employs its resources. In

addition, structural features such as the potential for achieving scale economies will also impact

productivity. Figure 2B.6 illustrates these main factors. This is followed by a discussion of labor‐related

issues and technical efficiency scale; the discussion of intermediate inputs & backbone services is covered

in the next section of the Toolkit.

Figure 2B.6: The main determinants of productivity at the factory or farm gate


One of the main determinants of the costs of producing a good is labor, including both costs and skills.

Labor costs are a function of the labor legislation and the structure of the market. The theory underlying

government interventions in the labor market is based on the fact that free labor markets are imperfect,

and as a consequence, there are rents in the employment relationship, which lead to both unfair and

48 The evidence on the impact of trade on productivity is not conclusive. A growing body of work has suggested that exporting confers little or no benefit in the form of faster productivity growth at the plant level (Clerides et al., 1998; Bernard and Jensen, 1999; Delgado et al., 2002). 49 Actually, the productive effects of inputs like labor and capital can impact productivity if there are input quality differences that standard input measures do not capture (see Syverson, 2010) .

PRODUCTIVITY

LaborIntermediate inputs and

backbone servicesTechnical efficiency

Labor markets and regulation

Land and infrastructure

Intermediate inputs Capital Equipment Utilities Business services Finance

Skills

Scale


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inefficient situations. The system of civil rights protections that applies to workers encompasses three

bodies of law:

1. Employment laws govern the individual employment contract;

2. Collective or industrial relations laws regulate the bargaining, adoption, and enforcement of

collective agreements, the organization of trade unions, and the industrial action by workers

and employers; and

3. Social security laws govern the social response to needs and conditions that have a significant

impact on the quality of life, such as old age, disability, death, sickness, and unemployment.

Labor legislation may work through various channels to impact firm labor productivity and eventual

profits. On the demand side, labor legislation may change the cost of employing workers (Figure 2B.7,

arrow 1)—through minimum wages, payroll taxes, worker benefits—thus constraining firm labor force

decisions, including hiring and firing, work shifts and the skill level of a firm’s workforce (arrow 3). These

effects on the size and composition of a firm’s labor force will have implications for firm labor

productivity directly (arrow 5) and indirectly through reduced level of R&D (arrows 6 and 7). On the

supply side, labor legislation may create incentives for workers to maintain or sever employment

contracts (arrow 2), which in turn will affect firm labor force investment decisions (arrow 8), with

implications for the composition of a firm’s labor force (arrow 4) or firm human capital investment and

search budgets (arrow 8), again affecting the labor productivity and profits of firms directly (arrow 5)

and indirectly (arrows 6 and 7). Notably, arrow 6 points in both directions.

Figure 2B.7: The channels of impact of labor legislation on firm productivity and profits

Hiring/Firing Decisions(labor demand)

Labor Regulation and Institutions

Frequency of job leaving, tenure (Labor supply)

Inadequate Training

Labor Force Size &

Skill Level

Innovation & Technological Adoption

Productivity

& Profits


142

Labor skills have an equally important role in the determination of productivity at both the firm and

economy level.50 As discussed by Syverson (2010), much of the work in labor economics has focused on

wages as the outcome of interest, while only a smaller set of work has looked at human capital’s impact

on productivity at the firm level. However, recent work using matched employer‐employee data sets

offered evidence on the importance of labor quality for firm’s productivity.51


Controlling for external factors, the productivity of any firm is ultimately a function of the effectiveness

with which its management makes use of the inputs available to it. This is captured in the concept of

firm‐level technical efficiency. While total factor productivity is classically obtained under the

assumption that firms optimally allocate their inputs, the reality is that some producers may be

systematically more successful in optimizing than others. Technical efficiency takes this fact into account

and reflects the ability of a firm to minimize input use in the production of a given output level with no

“guarantee” of achieving optimal allocation.52 One can thus say that technical efficiency is analogous for

firm‐level analysis to total factor productivity (TFP) in macroeconomic and sectoral studies.

Among the most important determinants of technical efficiency is the level of education, training, and

experience of its management. Indeed, Investment Climate Surveys have consistently highlighted the

importance of management education and experience in firm‐level outcomes. More recently, Bloom et

al (2010) developed a randomized experiment in India designed to measure if management practices

could be improved in badly managed firms and how much difference it would make from management

improvements. Early results reported suggest that management practices can be improved and that

improvements in management practices may lead to large increases in performance ‐ productivity levels

rose by about 15% and profits by about 24% in the treatment firms compared to control firms.53 In

addition to management skills and experience, many firms (especially SMEs) suffer from lack of access to

information on new technologies and methods of organizing production.

The average capacity utilization of a firm, which is the amount of output actually produced relative to

the maximum amount that the firm could produce with the existing machinery and equipment, is often

indicative of the efficiency with which the firm employs its fixed assets.

50 Human capital is a broad topic (Schultz, 1961) that encompassing “investments” in health, knowledge, and education at different ages. 51 See, in addition to Syverson (2010), Abowd et al (2003), Fox and Smeets (2009) and Galindo‐Rueda and Haskel (2005) 52 Technically, technical efficiency (TE) is a (one‐sided) deviation from a production “frontier” described by some common production function and is estimated simultaneously with the latter. In a stochastic production frontier model, TE may, roughly, be viewed as a “systematic” component of TFP, as TFP includes random shocks that are beyond managerial control. 53 Bloom and Van Reenen (2007) offer a comprehensive study relating management practices to productivity.


143

Factor Conditions: Intermediate Inputs and Backbone Services



Main components in intermediate inputs and backbone services




Quality Market

penetration

Scale economies

Intermediate inputs Land and infrastructure

Services inputs


Measures Sources

Scale Median firm size (output, workers, exports, etc.) –overall and exporters

Enterprise Surveys, national sources

# of firms in the sector; # exporting Enterprise Surveys, national sources

Level of intra‐industry trade – domestic and regional

Comtrade (regional); national sources (I‐O tables)

Intermediates and capital equipment

Comparative regional / global prices of key production inputs

Country‐specific analysis

Tariffs on key inputs and capital equipment WITS (TRAINS)

Domestic resources costs (DRC) of producing inputs in local market

Requires data on domestic and world prices and value added of inputs54

“Machinery and Equipment” price index International Price Comparisons Database

Share of material inputs and machinery inputs sourced from domestic v foreign markets

National sources (I‐O tables)

Land and infrastructure

“Housing and utilities” price index International Price Comparisons Database

“Construction” price index

Industrial land rent (per sqm) in main commercial city

Country specific data

Factory rent (per sqm) in main commercial city

Office rent (per sqm) in main commercial city

Backbone services ‐ utilities

See “housing and utilities” above International Price Comparisons Database

Electricity cost Country‐specific

Electricity quality (value lost due to power outtages) Enterprise Surveys

54 For a discussion and training presentation on calculating DRC, see http://www.fiscalreform.net/index.php?option=com_content&task=view&id=966&Itemid=1


144

Water cost Country‐specific

Water quality (value lost due to water shortages) Enterprise Surveys

ICT price basket ITU report

International internet bandwidth (bits/person) World Development Indicators

Fixed broadband internet connection charge and monthly subscription

ITU

“Communications” price index International Price Comparisons Database

Business services Local supplier quantity and quality ratings Global Competitiveness Index (WEF)


Interview targets


Scale and structural features

Ministry of Trade and Industry Competition Agency

Individual exporters (small / new and established)‐ across traditional and emerging sectors

Export councils or industry associations Inputs and backbone services

Ministry of Trade and Industry Ministry of Finance Ministry of Energy / Communications Utilities regulators Customs Authority State‐operated industrial parks

Individual exporters Export councils or industry associations Private utilities providers: electricity,

water, telecommunications, IT Industrial property developers Banks and other financial institutions Legal / accounting firms (or

professional association)

Key issues for discussion in interviews

Scale and structural features

General trends in productivity in the economy / specific sectors Trends in terms of capacity utilization in the economy / specific sectors Has there been any significant merger activity / consolidations? Why or why not? What is the participation of firms from outside the country in the value chain of key

sectors? Is there any evidence of mergers or value chain integration on a regional basis?

What are the impediments to integration into global and regional values chains? To what degree are external economies being exploited in industry agglomerations

/ clusters? What are the barriers to exploiting these opportunities?

Intermediate inputs and capital equipment

Any major restrictions to imports of key raw materials? Existing programs to allow for duty‐free access or duty drawback on key raw

materials – how effective? what barriers to take up? Availability and cost of key inputs in the domestic market Any factors constraining availability of quality local inputs: scale, competition,

protection, etc. Implications on competitiveness (cost, time, quality) of using imports versus local

supply of key inputs Local or regional market access to capital equipment and main intermediates


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(industry‐specific) Any protection of local suppliers Any border restrictions on importing capital equipment or important inputs (tariffs,

quotas, technical barriers) – what is behind this Any restrictions imposed by exporters of capital equipment (collateral, terms, etc.) Availability of capital to finance equipment imports Any special programs for duty‐free imports of capital equipment and/or

intermediates? How effectively does it work

Land and facilities To what degree is accessed to serviced land (or agricultural land) a problem – is it an issue of space, titling, regulation, etc.?

Any issues related to zoning, regulations, requirements to pay compensation, etc. Any issues around security of property rights Where are export‐oriented sectors based and what is the land availability for them? What reforms have taken place / are planned to address any legal and regulatory

constraints to land access? Any special facilities available for FDI or export‐oriented investors: location, types of

facilities, flexibility, etc.

Backbone services – Utilities

General situation with cost, access, and reliability of utilities – what are the main factors contributing to poor reliability

Structure of the utilities sectors – who are the providers and what is the general state of competition

Degree to which foreign investment is restricted in these sectors Role and effectiveness of the regulator Existing or planned PPP for delivery of power generation / distribution, water

distribution, ICT, etc Recent or future changes to regulatory structure

Business services Access to quality business services in local market Services provided by local firms v foreign Areas where no quality local services provided





Scale issues may limit productivity potential in some sectors

Access to quality business services also likely to be limited

Likely to be reliant on imports of many intermediates and capital equipment; therefore importance on understanding trade policy and other barriers to this

Resource‐rich May have access to certain raw material inputs at advantageous cost – this may offer source of competitive advantage but may also act as a bias toward activities in which the country may not have comparative advantage

Depending on the resources available (coal, oil) energy costs could potential be a source of comparative advantage – is this in fact the case or are the rents being taken by a monopoly?


Industry structure usually characterized by SMEs, so scale economies are a problem

Input costs (intermediates, utilities, capital equipment) often major barriers; but these are often policy induced and are not inherent

Middle income Achieving greater scale economies in production often a major opportunity


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Focus on input markets (especially utilities) and moving toward greater competition and PPPs; trade barriers may also remain for key inputs

Focus on inputs that will facilitate upgrading to services and knowledge intensive sectors, particularly ICT (regulatory, rather an infrastructure, issues are probably most important



Light manufacturing

Access to cost effective, quality raw materials is critical

Access to utilities also critical in some subsectors

The importance of scale economies will vary significantly by sub‐sector (e.g. very important for textiles, but less so for garments)

Agriculture Scale issues often critical – both in terms of production (in many low income countries, average farm sizes decline from generation to generation; many middle income transition countries have shifted from large collectives to highly fragmented ownership structures) and also post‐harvest processes

Access to cost effective inputs critical factor – important to understand government policies on tariffs and technical barriers to key inputs and capacity / quality of extension services

Land access issues (both for FDI and domestic investors) obviously fundamental as is core inputs infrastructure (e.g. irrigation, power)

Tourism Land and infrastructure issues obviously important – policies on FDI can be important for land issues and PPP possibilities for infrastructure


ICT infrastructure and pricing critical – regulatory and competition most important to understand here

Background reading: relationship between inputs & backbone services and trade

competitiveness

Scale economies

The potential to produce at an economically efficient scale can play an important role in determining

productivity. While scale almost always plays some role, its influence varies significantly by sector. For

example, producing at scale in textiles matters much more for competitiveness than in the manufacture

of garments. Generally, the capital intensity of the sector will be closely correlated with the relative

importance of scale. The potential to operate at scale may vary significantly across countries, both for

structural and policy reasons. In general, larger countries (think of China) are often in a better position

to have firms operating on a large scale than in smaller countries. Ultimately, factors like market access,

openness to FDI, and the degree of openness to cross‐border trade determine the potential for reaping

scale economies, as it is frictions in trade and investment which prevents achieving scale through firm

mergers and consolidation of value chains across or within countries.

In considering the role of scale economies, it is also important to recognize that scale economies can be


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realized externally as well as internally. This tends to be particularly important in sectors closer to the

technology frontier, where requirements for specialization and other market uncertainties make the

consolidation of activities within single firms less economically efficient (although it can also happen in

traditional craft‐linked sectors like clothing and footwear, for reasons linked to design, skills, and labor

market factors). In this case, the emergence of proximate industry clusters (agglomerations) may offer

the potential for reaping the benefits of scale externally, through access to deep pools of specialized

labor and suppliers and through access to industry‐specific public goods (e.g. testing facilities, logistics

platforms, etc.).

Production inputs and backbone services

In addition to labor, firm productivity is also a function of the physical capital that it employs in the

production process. This includes the cost and quality of land and facilities, capital equipment,

intermediate inputs, and utilities55. It also includes the financing costs involved in employing these

resources. Access to high quality, efficiently priced inputs and backbone services can strengthen the

export response to market access opportunities by lowering the costs of production and export. For

almost all of these issues, analysis should focus on understanding the regulatory structure of the market

and the degree of competition.

Intermediate inputs and capital equipment

Local market availability (or availability of competitive local supply) and the impact of trade policy

measures affect the degree to which firms can access materials and especially intermediate inputs cost

effectively. Where trade policy places tariffs or restrictions on imports, production costs rise; where

local producers of these inputs are protected from international and domestic competition, quality

eventually declines as well, with knock‐on effects on productivity down the value chain.

Because most developing countries lack market scale and in many cases technical capacity, most of the

capital equipment for production tends to be imported from abroad. This puts them at a competitive

disadvantage from the start due to the higher transport costs involved in acquiring the equipment from

abroad. In addition, in many developing countries maintenance costs of equipment also rise significantly

because of the need to bring in not only parts but also technicians from abroad (due to lack of skills or

simply proprietary knowledge of the equipment). The alternative in other firms is to not maintain or

operate the equipment properly, resulting in shortening its usable life or lowering its day‐to‐day

productivity. These disadvantages are compounded in many countries by several factors like currency

fluctuations, high costs of capital, and – most problematic – high tariffs and duties on capital equipment

(although many countries have schemes whereby producers can access capital equipment on a duty‐

free or reduced basis).

Land and facilities

55 Another critical backbone services is, of course, transport and logistics. This is addressed as a separate issue in its own right in Chapter 8 of the toolkit.


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Access to land, and especially to serviced industrial land, is a major barrier to competitiveness in many

countries. The challenge is often particularly acute for FDI, but can affect local investors equally (or in

some cases even more acutely, as foreign investors may have access to certain preferential

arrangements for accessing facilities, for example through special economic zones). In addition to the

simple availability of land and facilities, key issues that determine the impact on firm‐level productivity

include:

Location where serviced land and facilities are available, in relation to labor markets and major

transport infrastructure;

Time and cost of acquiring and registering the property, including obtaining titles, if necessary;

Land costs, including taxation;

Zoning / regulatory issues, including the process of obtaining environmental and other permits;

Flexibility of lease terms – in many sectors, investors seek to limit risk by taking on relatively

short‐term leases of factory “shells” or other units (e.g. on leases as short as 5 years);

Quality may also be an issue in some locations and particularly in some industries – this relates

particularly to industrial buildings and facilities for services activities (e.g. higher‐end ICTES); and

Security of property rights.

Utilities

Having access to relatively cost competitive and (most importantly) reliable power, water, and ICT

services is a critical determinant of firm‐level productivity. Indeed, evidence from ICA reports suggests

that inadequate supply of electricity is one of the top two or three biggest constraints facing firms in

most low income countries. The key utilities that need to be considered include:

Power: This may include gas, but in most cases the biggest issue is electricity. The relative

importance of power costs and reliability will vary significantly by sector, with capital intensive

sectors (e.g. aluminum) extremely reliant on power costs as are many light manufacturing

sectors (like textiles and garments). ICT and other professional services sectors are also, of

course, reliant on adequate power supply. The biggest issue for firms in many low income

countries is the lack of reliability of power supply, which results in many firms having to rely on

generators (usually diesel‐powered and usually doubling or tripling the cost of power) or face

long periods of manufacturing downtime.

Water: Although not as critical across all sectors, access to quality, efficiently priced water is

fundamental in most agricultural sectors as well as some manufacturing sectors (including iron,

steel and other metals as well as some agri‐processing activities like cocoa processing). Again,

although cost is important, the issue of reliable access is usually paramount.

Telecommunications: This includes fixed line and (increasingly more important) mobile

telephony, and broadband internet access. This is obviously most critical in the services sectors,

particularly ICTES and other business services. Again, reliability issues are critical here, although

access itself (especially to internet bandwidth) is also an issue in many developing countries.

Even more so than with electricity, price is often the biggest determinant of the degree to which

telecommunications backbone services facilitate or hinder competitiveness.


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In assessing the impact of utilities, the biggest issues tend to relate to infrastructure investments and

(related to this) market structure, including the degree of private sector participation and the level of

competition in the market. In addition, the regulatory and tax regime will have an impact on cost

structures.

Business services

The available and quality of local supply of business services can have an important impact on firm‐level

productivity. Specialized business services tend to agglomerate in larger markets and in larger cities

(within markets) and so the level of choice and quality of such services may be limited in smaller,

developing countries. Among such input services are: accounting, legal, marketing, business strategy,

printing and publishing, ICT, and industry‐specific technical services (e.g. research, testing, certification,

etc.). In relatively unsophisticated sectors and those in which a country has been operating for some

time, access to these business services inputs is likely to have only limited impact on competitiveness.

However, they play a bigger role in the establishment and development of new firms and particularly in

new sectors.


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Factor Conditions: Trade Facilitation and Logistics

Note to the Practitioner: This section addresses issues related to transport, trade facilitation and logistics. Analysts looking to conduct a comprehensive analysis of the transport and trade facilitation (TTF) environment should consult “Trade and Transport Facilitation Assessment: A Practical Toolkit for Country Implementation” (TTFA). This document (available in hard copy and CD‐ROM from the World Bank International Trade Department) provides a detailed, step‐by‐step program for analyzing the TTF environment in any country. This section draws heavily from the above publication but the version presented here is at a less detailed level. The analyst will be guided to various parts of the TTFA, where appropriate.



Main components in trade facilitation and logistics




Quality Market

penetration

Distance Inbound trade facilitation and logistics

Outbound trade facilitation and logistics


Indicators Sources

Cost Export cost (by land and sea/air) Import cost (by land and sea/air)

Cost to export and import

Cost per kg for a 500kg shipment by air (benchmark to key markets)

LPI Doing Business Freight forwarders

Time and reliability Export time (by land and sea/air)

Import time (by land and sea/air)

LPI score (overall) Doing Business – Trading Across borders (overall; time to export and import)

% of value lost in transit due to breakage or theft

LPI, Doing Business Enterprise Surveys

Distance Distance to markets by sea and road LPI, websites of shipping lines, other shipping related websites (e.g. portworld.com; e‐ships.net; distances.com)

Connectivity Liner shipping connectivity index Air traffic statistics

UNCTAD IATA

Physical infrastructure

Infrastructure score

LPI

Customs and trade facilitation

Customs score

Clearance time: with and without

LPILPI; Enterprise Surveys


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inspection; import and export

Physical inspection rate

LPI

Transport and logistics services

Logistics Quality and Competence score

Tracking and Tracing score International shipments score

LPI

Note that in large countries, national metrics on costs, time, and reliability performance may have little

relevance for some producers, particularly those in more peripheral regions. As such, it may be

necessary to collect some data at the subnational level. Although comparative data may be limited, it

may be possible in some countries to map out market access to / from nearby ports and airports, to get

performance statistics on specific ports, and (making use of World Bank Enterprise Surveys or National

Manufacturing Census) to get an indication on relative shipping costs, customs clearance times, and

other performance criteria at a subnational level. For additional sources of data on a wide range of

transport and logistics related factors that may be included in the Diagnostic, please refer to the World

Bank’s Trade and Transport Facilitation Assessment Toolkit.


Interview targets

Importers and exporters Export manufacturers and other producers

Importers: manufacturers, wholesalers, retailers, traders

Transport service

providers

Road transport

Railways

Ocean shipping

Air freight

Container terminal operator

Logistics service

providers

Customs—land border

Customs—international gateway

Clearing and forwarding agent

Integrated 3PLs (3rd party logistics)

Consolidator, storage

Bonded warehouse operator

Free zone operator

Banks

Ministries and Agencies Commerce and trade

Finance

Transport

Agriculture

Health

Export promotion agencies

Preshipment inspection

Issues to be covered during the interviews will necessarily be dependent somewhat on the supply chains

being studied, as well as on country and region‐specific factors.


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Key issues for discussion in interviews (Source: World Bank TTFA Toolkit)

Exporters and

importers

• Type of commodities exported, volumes shipped and how this has been changing

• Role of logistics in improving competitiveness of exports

• Integration of outbound supply chain for principal exports • Regulatory procedures significantly increasing documentation, cost and time for

shipments

• Role of ICT in simplifying transactions including managing orders, expediting regulatory procedures and coordination of logistics shipments

• Problems caused by quality of transport infrastructure and operations including ports and border crossings

• Opportunities for mitigating these problems

Road transport • Principal trades (commodities and routes) handled and volumes shipped

• Value‐added services offered • Description of typical supply chain for shippers • Fleet size and truck types • Vehicle annual productivity • Typical shipping times and rates

• Mechanisms for increasing load factors and reducing empty backhauls

• Use of information and computer technology for contracting trucking services and managing fleets

• Impact of other government regulation on quality and competitiveness of services

• Effect of taxes, tolls and formal and informal road checks on intrastate movements?

• Impact of quality and capacity of the road network on transport time, cost and reliability

• Problems with security on primary routes and impact on time and cost

• Other impediments to improving trucking services

• Existing programs or proposals to overcome these impediments

Railways • Principal foreign trades (commodities and routes) handled and volumes shipped

• Unit train operations‐ scheduled and on‐demand

• Value‐added services offered • Description of typical supply chain for shippers using rail service • Contractual arrangements and performance standards included in agreements

• Typical shipping times and rates

• Procedures for pricing services including backhauls • Use of information and computer technology for arranging shipments and scheduling

movements

• Impact of condition and utilization of the rail network on transport time, cost and reliability

• Other impediments to improving rail services?


Ocean shipping • Principal trades (commodities routes and TEU)

• Vessel size by route • Complementary services offered

• Description of supply chains for typical consignees and shippers • Primary direction for loaded containers and efforts to improve balance


• Typical dwell time for containers inbound and outbound


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• Difficulties with clearing containers • Electronic transfer of ship manifests, load plans and other information to expedite

movement of cargo and vessels

• Other government regulatory procedures affecting efficiency of shipping services

• Impact of quality and capacity of the port facilities and services on transport time, cost and reliability

• Other impediments to improving shipping services?


Air freight (only when the country has a sector that makes significant use of air freight)

• Principal trades (commodities and routes) handled and volumes shipped

• Value‐added services offered • Aircraft capacity and frequency • Primary direction for cargo and efforts to improve balance

• Description of typical supply chains for shippers and consignees • Typical dwell time for inbound cargo


• Information and computer technology used for arranging shipments, and submitting shipping documents

• Impact of other government regulation on quality and competitiveness of services

• Impact of quality and capacity of the airport on efficiency and cost

• Other impediments to improving airfreight services?


Container terminal operator

• Principal shipping lines served and trades • Traffic volume (vessels and TEU)

• Vessel size by route • Berth and crane productivity • Value‐added services offered • Description of typical landside and waterside logistics • Terminal handling charge

• Typical dwell time for containers inbound and outbound

• Difficulties with clearing containers • Congestion in land access to the terminal

• Impact of other port infrastructure on efficiency

• Use of information technology for managing storage and berth, scheduling container movements, notifying shippers and consignees

• Other impediments to improving shipping services


Customs • Type and Volume of Activity

• Principal enforcement responsibility and performance targets

• Primary source of violations

• Procedures for clearing inbound and outbound cargo • Impact of complex regulations on efficiency and effectiveness

• Efforts to modernize processes and increase transparency including automation and risk management

• Efforts to move clearance activities off the border and to allow movement of goods in transit

• Other problems preventing more efficient and transparent activities

• Opportunities for mitigating these problems

Clearing and forwarding agents;

• Principal trades (commodities and routes) handled and volumes shipped

• Range of logistics services provided including value added


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integrators and 3PLs (3rd party logistics); consolidator; warehouse operator; free zone operator

• Priorities of clients in term of time, cost and reliability

• Ways to establish competitive advantage

• Responsibilities for clearing cargo, typical clearance times and problems with clearance procedures

• Government regulation that limit type of services and markets served

• Use of computerization and modern communications for contracting, scheduling and coordinating services

• Impediments to improving the quality of services

• Are there existing programs or proposals to overcome these impediments

Ministry of Trade and Ministry of Finance

• Role of trade in economy

• Reduction of regulation of trade, import and export

• Use of revenue targets for customs

• Efforts to simplify customs procedures

Ministry of Transport • Plans to improve quality of transport infrastructure serving foreign trade including ports and airports

• Procedures and effectiveness of regulations of road safety, security, overloading, vehicle roadworthiness

• Efforts to improve quality and utilization of long distance trucking services

• Commercialization and privatization of cargo handling facilities at ports and airports

• Efforts to simplify regulation of truck operators, licensing, rates and area of operation

Ministry of Agriculture; Ministry of Health

• Principal regulatory responsibilities • Most important commodities that require regulation

• Source of greatest threats • Authority responsible for notification of arrival of controlled goods? • What are the sources of alerts

• Use of risk profiling in determine whether to inspect and test the cargo

• Proportion of the shipments physically inspected and typical time required

• Efforts to develop secure supply chains Proportion of controlled shipments subjected to laboratory tests and time required

• Efforts to simplify regulations

• Efforts to improve efficiency and transparency of regulatory procedures

• Efforts to improve exchange of information regarding alerts among agencies and with shippers

• Other impediments to increasing the efficiency of regulatory function

• Existing programs or proposals to overcome these impediments?

Analytical approach

Assessing a country’s trade facilitation and logistics environment requires looking at a wide range of

issues – including trade‐related infrastructure, transport and logistics services – and at several border

and behind‐the‐border procedures. Table 2B.3 summarizes the main components of the trade

facilitation and logistics environment that should be covered in a basic assessment. Table 2B.31 is based

on the Trade and Transport Facilitation Assessment framework but is presented here in a reduced form

with the aim of conducting a high level assessment on a countrywide basis. If the analyst requires a

more in‐depth assessment, for example wanting to explore in more detail the institutions and

regulations that govern the trade facilitation environment or wanting to understand supply‐chain

related issues in a specific sector) they may wish to widen the scope of the analysis. In this case, the

analyst is directed to the Trade and Transport Facilitation Assessment toolkit, where they can find


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additional details on policy issues – specifically, see Table C1 and Box C1 of the toolkit.

Table 2B.3: Summary of main components of trade facilitation & logistics assessment

Components Policy areas and main issues

Trade logistics performance

a. Trade logistics patterns

1. Availability of statistics, sources

2. Volume by routes, modes, and gateway

3. Main commodities in volume

b. Logistics performance: cost, time, reliability on the main routes. Arbitrage costs reliability by exporter and importers, specific commodities

c. Other issues: economies of scale, backload

Tools and institutions to measure and assess logistics performance

a. Statistical instruments for trade in volume

b. Logistics performance on main routes and at gateway in terms of cost, time, and reliability

Availability, quality, and performance of services

a. Logistics competence: practices and skills with consignees

b. Trucking market structure

c. Trucking operational performance

d. Freight‐forwarding and integration

e. Customs brokers

f. Railways services

g. Express

h. Banking and insurance

i. Warehousing, 3PLs (3rd party Logistics)

j. Others: air cargo, river services

Regulation of transport and logistics services

a. Licensing of transport—equipment and operations

b. Effectiveness of freight regulations (e.g., axle load)

c. Domestic and regional regulation of long‐distance transport

Quality, reliability of logistics services

a. Foreign participation in logistics services

b. Availability of value‐added logistics services, and conducive regulations

c. Access to information on available services

Trade and customs facilitation

a. Coordination, transparency, security and IT

b. Customs clearance

c. Customs regimes

d. Import and export chains, main steps, and structure of delays

Customs modernization

a. Transparency and consistency of customs clearance procedures

b. Improvement of clearance and border facilities (physical and IT).

c. Introduction of modern practices conducive of professionalism. (risk management, authorized operators)

d. Coordination among border agencies and procedural consistency with customs

International connectivity and transit systems

a. Transit systems

b. Port/shipping connectivity

c. Customs performance

d. Facilitation of multimodal transportation

Transit regime

a. Transit systems applicable on international road and rail corridors.

b. Reduction of controls at the border and en route

c. Domestic and regional regulation of entry of transit operators.

Air and sea connectivity and liberalization of services

a. Air transport services, passenger and cargo

b. Shipping services, impact of feeder services

Trade supporting infrastructure Public infrastructure


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a. Roads

b. Ports

c. Railroad

d. Airports

e. Other backbone infrastructure

Source: Trade and Transport Facilitation Assessment (World Bank, 2010b)

a.Adequacy of maintenance funding and policies

b. Port development

c. Improvement in service delivery (price and quality) and private participation.

d. Development of logistics hubs such as logistics centers (in or not in free zones), inland clearance facilities, and dry ports/inland container depots

e. Addressing congestion problems in rural areas

f. IT infrastructure

The approach outlined in this section is based on a scaled‐down version of the “Phase 1” assessment as

developed in the Trade and Transport Facilitation Assessment (World Bank, 2010b).

Once the objectives of the assessment are defined, the key starting point is to identify a limited set of

commodities / products and trade relationships on which to focus. This is necessary because the

structure of the supply chain, the nature of transport, and the regulations and procedures involved will

vary significantly across products – for example, the trade logistics issues facing an exporter of fresh cut

flowers vary dramatically from those facing an exporter of coal or of consumer electronics. It will be

critical to also address the import side of supply chains, as this is where many of the biggest

performance gaps are found. Selection of the supply chains to study should focus on those supply chains

that represent particularly important export sectors or potential new opportunities. Decisions on

selection should balance the needs of comprehensiveness and strategic importance with potential

implications of time, cost, and complexity.

Following this, desk research can be undertaken – in most countries significant existing research is likely

to have been conducted in recent years by the World Bank and other development partners. This can

provide valuable background input prior to undertaking field interviews.

In conducting the analysis, it is valuable to try to understand the degree to which the constraints are

related to the transport environment or the border and trade facilitation environment. Experience

shows that it many countries where problems exist in the transport environment, the border

environment is also poor. Indeed, in some cases there will be some links between the two. However,

where it is possible to isolate the main sources of constraint, identifying the policy levers to address it

will be a much easier task. One way to begin to focus the direction of the analysis is through the first

stage of comparing performance through benchmarking key quantitative metrics (see next section). For

example, if analyzing Rwanda, a quick look at its relative performance across the LPI measures (see

Figure 2B.8) suggests that customs and infrastructure are major constraints that should be assessed.


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Figure 2B.8: Comparison of Rwanda LPI performance

Source: Logistics Performance Index

It is recognized that institutions and regulations play a major underlying role in establishing the trade

facilitation environment, and so are likely to be at least part of the problem, wherever constraints exist.

For the purposes of the Diagnostic, however, the framework does not focus on understanding

institutions and regulations in detail. Rather, the emphasis is in trying to identify broadly the observable

areas in the trade facilitation environment in which the binding constraints exist. A second stage of work

could then drill down into understanding the institutional and regulatory factors behind this. For

analysts who wish to address these issues in more depth, the TTFA Toolkit provides a guide to assessing

institutional and regulatory issues.

Finally, note that the analytical framework described here is designed to analyze a country’s overall

trade and transport facilitation environment. In many countries, the analyst may wish to assess specific

export sectors. While the above framework may still be adopted for a sector‐specific analysis, the

analyst may also want to consider making use of value chain analysis, to study the sector in greater

depth, including understanding the impact of the inbound trade logistics environment in shaping access

to competitive inputs.



Country type Relative priorities Other issues for consideration

Landlocked May be emphasis on role of air transport (depending on export sectors)

Greater emphasis on border‐related issues (including customs and other border processes) as well as transit regimes and cross‐border trade

Likely to be necessary to extend analysis to cover regulations, processes, and agencies in bordering (especially those where the main regional port is based)

Corridor analysis may be useful approach

0

0.5

1

1.5

2

2.5

3

3.5

4

Rwanda

Peer avg (Tanzania,

Kenya, Uganda)

Hungary


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regulation Cost and time comparisons should include benchmarks against other landlocked countries

Landlocked countries may have potential to develop logistics sector as important regional transit hubs

Small (population) and remote

Greater emphasis on speed and efficiency of logistics environment

Greater emphasis on role of air transport

Exporters tend to be more dependent on imported inputs – so emphasis on efficiency of inbound supply chains

Small and remote countries often also landlocked

Explore the implications of scale in logistics costs and the potential for improving consolidation in supply chains

Lack of scale increases importance of ensuring local logistics market is open to foreign service providers

Resource‐rich Existing infrastructure and supply chains often designed for resource extraction; focus on understanding effectiveness of supply chains (e.g. rail and ports systems as well as customs and trade facilitation) to support export diversification


No specific focus inherent to these countries – often face challenges across the board

Middle income Emphasis on processes, institutions, and supply chain issues


Sector Relative priorities Other issues for consideration

Light manufacturing

High reliance on imported inputs in most light manufacturing sectors requires a focus on inbound logistics processes

Clearance speed and processes often critical (outbound and inbound)

Air transport will also be a important channel for some subsectors

Many sectors will have special customs regimes for imported inputs designed for export manufacture

Agriculture Perishability of many agricultural products means that cold chain networks (including infrastructure and transport / logistics services) should be a priority

For bulk commodities, rail and even river‐based transport infrastructure and services tends to be more important than it is in other sectors

Border‐related issues are critical, linked to both tariff and non‐tariff barriers (health and safety)

Individual agricultural sectors often have quite customized logistics networks that will need to be analyzed closely


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Tourism Traditional logistics issues are relevant for supply side of the sector, but otherwise focus is on the passenger transport network – especially road and air transport

Primary emphasis on connectivity and cost (internal and to key source markets) – here infrastructure and services are critical, as are institutions and regulatory issues (e.g. air transport liberalization)

Quantitative and qualitative analysis should focus on connectivity, which may require assessment not only of focus country but also its main tourism source markets

Assessment of public transport systems and of safety and security may also need to be included in the analysis


As with tourism, the traditional logistics issues are less relevant for this sector – primary focus will be on the passenger transport network and issues of connectivity

Note that the logistics services sector may itself be a focus of assessment, in which case all aspects of the logistics environment in the country will be important in the assessment.

Background reading: relationship between trade facilitation & logistics and trade

competitiveness

For exporters in many developing countries, comparative advantage is eroded step‐by‐step across the

miles between production and markets. Distance alone will, in many sectors, determine the potential to

compete in international markets. But more controllable factors, such as transport and communications

infrastructure, border‐related processes, and local logistics markets, will play a critical role in shaping

exporters’ competitiveness through their impact on cost, time, and supply chain reliability.

Figure 2B.9: Relationship between Logistics Performance and Exports

Source: Logistics Performance Index (2010) and COMTRADE (US$ exports, 2008).

Indeed, in recent decades the role of trade facilitation and logistics as a source of trade competitiveness

2

2.5

3

3.5

4

4.5

4 5 6 7 8 9 10

LPI score

log exports


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has increased substantially. This is for two main reasons. First, with increased trade liberalization, the

transactions costs imposed by transport and trade facilitation have become, in most cases, more

significant than tariffs. Second, the emergence of highly integrated global production networks and the

shortening of product lifecycles has raised the importance of timely and cost effective logistics. Thus, the

cost and quality of the logistics environment often plays an important role in determining firm‐level

decisions on where to locate production, where to source supplies, and how to serve consumer markets.

Data from the World Bank’s Logistics Performance Index (World Bank 2010a) show a clear relationship

between logistics performance and exports (see Figure 2B.9). Empirical literature tracing the effect of

transport and trade facilitation constraints on trade flows, while limited by the difficulties of properly

measuring these barriers (Inter‐American Development Bank 2010), shows unequivocal impacts of time

and costs on developing country exports and particularly perishable agricultural products (Djankov,

Freund, and Pham 2006) and on the composition of trade (Li and Wilson 2009).

Developing countries tend to suffer from a myriad of issues – including poor infrastructure, inefficient

systems, corruption, and lack of competitive logistics markets – that contribute to high cost and

unpredictable trade logistics environments (see Box 2B.14)

Box 2B.14: The gap between developed and developing countries in trade logistics High logistics costs and—more particularly—low levels of service are a barrier to trade and foreign direct investment and thus to economic growth. Countries with higher overall logistics costs are more likely to miss the opportunities of globalization. Take landlocked Chad. Importing a 20‐foot container from Shanghai to its capital N’djamena takes about ten weeks at a cost of $6,500. Importing the same container to a landlocked country in western or central Europe would take about four weeks and cost less than $3,000. The shipping costs and delays from Shanghai to Douala, the gateway for Chad, and to West European ports are essentially the same. And the same international freight forwarding company would handle the container from Douala to N’djamena and within Europe. But what accounts for the large difference in time and cost? The answer lies in better processes, higher quality services, and the operating environment. The forwarder in Europe would use a seamless, paperless system to manage the inland shipment from its eight‐hectare campus in the gateway port of Le Havre. The transport inside Europe would take less than three days. And to add value for its client and generate more business, the forwarder would provide additional services, such as improving the client’s internal distribution practices. In Chad the process would be different. While only five days should be needed to move the container from Douala to N’djamena, the actual time would likely be as long as five weeks. In a difficult governance and security environment, the freight forwarding company would be trying simply to avoid a breakdown in its client’s supply chain. It would maintain company staff along the trade corridor to physically track the goods and trade documents. And it would have to be ready to mediate with the trucking syndicate, the security forces, and myriad government agencies. Source: Logistics Performance Index (World Bank, 2007)

As indicated in the box above, trade facilitation and logistics impacts export competitiveness through

several channels. While structural factors like distance may act as an absolute barrier to participation in

exports markets (in certain sectors), the main channels through which trade facilitation impacts export


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competitiveness are through transactions costs and risk (which is a function of time and reliability).

These are summarized briefly in the remainder of this section.

Direct costs of exporting and importing

The direct cost of exporting includes, among other things the cost of transport, insurance, fees to

logistics service providers (e.g. freight forwarders), and administrative fees for customs and other

border procedures. The largest component of these costs is transport and, in this regard, two of the

biggest determinants are distance to market and the transport mode required. Indeed, landlocked

countries – which tend to be located far from markets but, most importantly, are forced to ship much

greater distances by ground transport rather than sea transport –tend to face much greater direct costs

of exporting. For exporters with products that are particularly time sensitive (e.g. because they are

physically perishable), reliance on air transport raises costs dramatically – the cost for air freight is

typically 4‐5 times that of road transport and 12‐16 times that of sea transport (World Bank, 2009). Cut

flower exports, for example, often incur air transport costs of up to 50% of CIF value.

Scale economies also affect transport costs. In small economies the costs of maintaining trade‐related

infrastructure (both public and private sector) raise the costs for exporters. Moreover, exporters are

often unable to take advantage of less‐than‐truckload or shared container shipments, and the lack of

two‐way traffic means they must often bear the cost of shipping empty containers or trucks.

However, beyond mode, distance, and scale, other factors – which are in theory more controllable –

shape the transactions costs involved in exporting. One of the most important of these is the level of

competition in local transport and logistics markets. In many markets, transport and logistics services

operate as oligopolies or engage in collusion (e.g. tour de role) to maintain high prices (and usually poor

service). Regulations which often restrict the provision of services from foreign transport providers

contribute to uncompetitive local markets in many countries. On top of competition, other factors

include high fees for customs and other documentation, high port and handling charges, the need to hire

agents to facilitate clearance, and / or the need to pay bribes to facilitate the movement of goods.

Induced costs: time, risk, and reliability

Perhaps even more important than the direct costs are the induced costs that firms must bear related to

timeliness, and particularly, reliability of the transport and trade facilitation environment. Time in itself

raises costs, in terms of financing, insurance, and warehousing. Research by Hummels (2001) finds that

each day saved in shipping time is worth 0.8 percent ad‐valorem for manufactured goods. In West

Africa, for example, additional delays from other sources including goods being held in customs at the

port, border crossing delays, and formal and informal road checkpoint combine to make round trip

times for a 2,000km journey as much as 40 days in the region (i.e. an average of only 50km per day). This

has significant implications on the capital utilization of the transport fleet in the region and subsequently

on the cost of trade – while the average monthly mileage for trucks in Southern African regional

transport is 8,000‐9,000 km in countries like Mali and Niger it is no more than 2,500km (Egis BCEOM

International, 2008).


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But the most important issue is the predictability and reliability of the supply chain. The absence of

predictability and reliability raises risks for firms, forcing them to hedge, for example by carrying greater

inventory of supplies and end products, to source from alternative suppliers, or to shift to air transport

or other more expensive modes in order to meet delivery schedules. According to the World Bank’s

Logistics Performance Index, suppliers to the same automobile manufacturer will carry 7 days of

inventory in Italy, but 35 days in Morocco; and garment exporters in Bangladesh have to export, on

average, 10% of production by air in order to be certain to meet the schedules of European buyers.

Finally, most exporters (particularly those operating in these global value chains) also rely on importing

critical raw materials and intermediate inputs from international suppliers. As such, all the direct and

indirect costs discussed in this section also raise production and inventory costs for exporters.

The impact of poor reliability in the trade logistics environment imposes a significant opportunity cost

on exporters, restricting their ability to diversify into higher value added production and to integrate

into global value chains, both of which rely on predictable, “just‐in‐time” production and delivery.


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Trade Promotion Infrastructure: Export and Investment Promotion



Main components in export and investment promotion




Quality Market

penetration

Export promotion Investment promotion

*Note that Trade Finance is covered under the section on “Access to Finance”


Indicators Sources

Export promotion

agencies

Exports per US$ EPA budget World Bank EPA Survey

Export promotion agency (EPA) budget (% GDP or per capita)

Share of EPA expenditure: 1) market research / information; 2) training / tech support; 3) marketing / other

Share of EPA expenditure by main sector

Share of EPA expenditure: new v established exporters

Investment

promotion agencies

FDI flows and stock (share of GDP; per capita) UNCTAD

FDI flows and stock per US$ IPA budget Country‐specific, IMF

IPA performance score‐ overall World Bank Global Investment Promotion Agency Benchmarking (GIPB)

IPA performance score‐ website

IPA performance score‐ enquiry handling



Export promotion

agencies

Export promotion agency (national and, if relevant) regional

Ministry of Trade and Industry or other ministry with responsibility for export promotion


Training institutions Export councils or associations Consultants / service providers

Investment

promotion agencies

Investment promotion agency (national and, if relevant) regional

Ministry of Trade and Industry or other ministry with responsibility for investment promotion

Agencies responsible for: company registration, land purchase and registration

Existing investors – across traditional and emerging markets and sectors

Potential new investors (or investors considering the country)

Chambers of Commerce Industry associations


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Embassies of major investors

Key issues for discussion in interviews with government agencies and ministries

Export promotion

agencies

Structure of the EPA: single or multiple agencies? links to government ministries? structure of executive board and level of private sector participation on the board?

Management structure: is it operated by the private sector? Structure of budget and sources of funding? Is there a broad sector focus to export promotion support activities? Is there a focus on non‐traditional exports? Is there a focus on new exporters v established? Also small v large firms? What is the focus on breaking into new markets v ‘survival’? What efforts are made to track support on an ongoing basis? What is the focus of information provision? What is the focus on marketing and trade fairs? What is the focus of training and capacity building – regulatory compliance,

documentation, accessing trade finance, logistics and customs, packaging, pricing, etc.

What is the focus on regional markets v major global markets? For the latter on EU v US v Japan v China v other markets?

Investment

promotion agencies

Structure of the IPA: links to government ministries? structure of executive board and level of private sector participation on the board?

Structure of budget and sources of funding? What is emphasis of efforts between: image building, investment attraction,

aftercare, and policy advocacy? What are the main targets in terms of sectors and markets? What explicit links are made between the IPA and the EPA? What incentives are offered and how important are these in the overall offering to

potential investors?

Key issues for discussion in interviews with the private sector and other institutions

Export promotion

agencies

What are the main challenges in terms of entering and staying in export markets? Are there specific markets (product or geographical) that are seen as high

opportunity or a particular challenge? How effective is the EPA and other government support agencies? What are the

main strengths and weaknesses? To what degree are the main challenges related to: marketing? building contacts /

networks in export markets? Meeting technical / regulatory requirements? Other?

Investment

promotion agencies

What are the main requirements for investors: in terms of infrastructure, regulatory framework, transport, incentives, etc.

To what degree have they invested in Country X to access local markets or to establish a base for exporting?

How do they view Country X as a location for investment? Across sectors and relative to alternatives in the region

What are the main advantages and disadvantages of the country as an export platform?


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Strategic prioritization across all aspects of trade promotion will be critical given limited resources

Importance of targeted and efficient EPAs and IPAs

Resource‐rich Emphasis on use of trade promotion tools to support diversification – EPA and IPA roles likely to be priorities

Does the program of trade promotion effectively leverage the existing natural resources sectors (by facilitating development of supply and services sectors / clusters)?



Importance of targeted and efficient EPAs and IPAs

Middle income Often the main issues will focus on adjustment processes and moving to higher value‐added activities – how does the incentive system, and the wider programs of trade promotion support facilitate efficient adjustment (toward sources of comparative advantage) v support traditional sectors

Analysis of EPA and trade promotion may focus more on survival and effectiveness in reaching non‐traditional markets



Light manufacturing

The need to move beyond traditional promotion activities to training, market information, and other enterprise support

For any sector‐specific analysis, check on IPAs expertise in the sector and their links with sector bodies

Importance of link between EPA and IPA with regard to attracting investment in export‐oriented activities / global production networks

Agriculture Many EPAs and IPAs have limited expertise in this area

Role of state trading firms or marketing monopolies in export promotion

Tourism Focus analysis beyond EPA/IPA to Tourist Board or related agency, which may control all investment and export promotion in the sector

Business and IT

services

Assess capacity of EPA for addressing services sector needs

Background reading: relationship between export & investment promotion and trade

competitiveness

Establishing and maintaining competitiveness in export markets requires not only getting the

microeconomic environment right to support exporters and ensuring investment is channeled to the

firms and sectors that are most able to exploit sources of comparative advantage, it also requires

addressing market and information failures, providing public goods, and improving coordination and the


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diffusion of knowledge and best practices. Here, governments play an important role through – through

export and investment promotion agencies – in the provision of a broad range of instruments designed

to support exporters and to attract investment in export‐oriented activities. Table 2B.4 provides a

summary for each, including their purpose, the reasons for government intervention, and how these

interventions might support competitiveness of firms or the export sector more widely. Trade and

investment support focuses largely on the extensive margin – on new products and new markets –

although many measures listed in 2B.4 will impact the intensive margin, particularly in terms of

addressing export survival and facilitating quality upgrading within existing products.

While these interventions can all be defended as addressing some form of market, information, or

coordination failure, it is by no means certain they represent efficient or effective mechanisms to

promote trade competitiveness. It can be argued that in many cases some of these interventions are in

fact distortions to competitiveness which may not only harm trading partners by artificially changing the

terms of trade but actually undermine competitiveness in the long term. On the other hand, some

interventions by EPAs and IPAs are designed to address problems of information and coordination

failure that can be particularly acute in export markets.

Table 2B.4: Summary of key trade and investment support measures

Purpose Reason for government provision

Potential impact on competitiveness

Export promotion

agencies

Enable existing and new exporters to access information, establish contacts, and initiate trade in export markets

Information failures (mostly non‐rival)

Entry costs as barriers to exporting

Reduces entry costs Reduces risk / improves survival

Investment

promotion agencies

Attract investment (mainly FDI)

Information failures

Spillover benefits Diversifies export base Improves aggregate productivity

Technology / knowledge spillovers

Export promotion (agencies)

Trade promotion support is designed to help existing and potential exporters to understand the

requirements of export markets (tastes, standards, regulatory requirements), and to identify and exploit

markets for their products. In most cases this support is delivered through an export promotion agency

(EPA). The case for government intervention to support exporters is usually made on the basis of the

(mostly non‐rival) entry barriers to exporting (e.g. high fixed costs of making contacts, establishing

distribution networks, learning about compliance, obtaining licenses), which would in particular deter

“pioneer” exporters (Hausmann & Rodrik, 2002).

There has been limited empirical analysis of the effectiveness of EPAs, but recent evidence (Lederman,

Olarreaga, & Payton 2009) finds that they have a positive and statistically significant impact on national

exports, with important heterogeneity. First, returns to EPAs increase in line with GDP per capita – i.e.

richer countries have more effective EPAs (or, EPAs can be more effective in richer countries). Second,


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they find decreasing returns to EPA spending, with negative marginal returns after US$1 per capita.

Finally, the return on investment in EPAs was highest in Eastern Europe and Asia, with agencies in the

Middle East and North Africa lagging furthest behind.

The impact of trade promotion support on competitiveness comes both by supporting “discovery” as

well as improving exporters’ technical capabilities to participate in export markets. Essentially trade

promotion reduces start‐up costs and lowers risk, and potentially facilitates higher quality and lower

cost exports. In terms of discovery, trade promotion support can help exporters find and access product‐

market combinations that they might not otherwise be able to exploit. This means there may be a

potential for economy wide efficiency impacts from export promotion, in terms of helping deepen

specialization in areas of comparative advantage. Export promotion support also lowers market entry

costs, providing a direct cost advantage to exporters. An indirect cost advantage may subsequently

follow if this facilitates greater scale of exports, for example by lowering the cost of transport,

compliance, etc. Finally, through the provision of technical support, capacity building, and informational

support, EPAs can help ensure compliance to standards, thus lowering risk and potentially increasing

quality of exports.

Investment promotion (agencies)

Attracting foreign direct investment (FDI) is an important component of export development strategies

in most countries. FDI not only contributes to economic growth through the provision of capital and

employment, but most importantly, in the medium and long term, through its dynamic effects – it is a

source of significant positive externalities through knowledge spillovers, the introduction of new

technologies, and demonstration effects (Carkovic & Levine, 2005). It is these externalities, along with

the market failure inherent in the provision of information on the potential returns in alternative

investment destinations, which is the basis for government provision of investment promotion through

the establishment of investment promotion agencies (IPAs).

The literature on FDI defines two broad types of investment (Helpman, 1984; Markusen, 1984):

investment seeking to access a local market (often referred to as “horizontal” or “market‐seeking” FDI);

and investment designed to take advantage of the cost or quality of certain factors of production (often

referred to as “vertical” or “efficiency‐seeking” FDI) to establish a platform for regional or global

exports. For horizontal FDI, the attractiveness of a local market might in some cases be strong enough to

obviate the need for significant promotion efforts. Countries like China, Brazil, and Russia are examples

of this. However, for most vertical FDI56, investors are somewhat footloose between alternative

locations. For small countries, especially, the role of promotion may be critical to getting on the “radar

screen” of potential FDI. Singapore and Ireland are two well‐known examples of small countries that

have been effective in their efforts to attract export‐oriented FDI. Empirical evidence (Harding &

Javorcik, 2007) confirms the positive role of investment promotion efforts in increasing FDI flows to


56 One exception may be where FDI is targeted a natural resource or other endowment that is not widely available or earns particularly high rents.


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Investment promotion supports trade competitiveness primarily by attracting competitive investors. If

these are exporters themselves, they may contribute to diversifying a host country’s export profile. They

are also likely to increase the aggregate competitiveness of the country’s exporters, as foreign investors

– like exporters in general – are on average more productive than domestic producers (Melitz, 2003).

Finally, FDI may contribute the competitiveness of exporters, whether or not they are themselves

exporters, through the provision of competitive inputs and through the spillovers of the knowledge and

technology they bring into the host market.

Main components of trade & investment promotion support analysis

In analyzing a country’s program of trade promotion support, it is necessary to assess the specific

components and activities involved in each instrument of support. This allows for an understanding of

the scope of the support and the areas in which support may be missing or performance lacking.

Export promotion (agencies)

Assessment of an export promotion agency and its contribution to export competitiveness should cover

the main activities that are traditionally carried out by an EPA, including:

1. Country image building: advertising, promotion, advocacy (lobbying)

2. Targeted marketing: trade fairs and missions, services provided to cultivate contacts in foreign

markets

3. Export support services: training, technical assistance, capacity building, including regulatory

compliance, information on trade finance, logistics, customs, packaging, pricing

4. Market research and sector analysis: general, sector, and firm level information, such as market

surveys, on‐line information on export markets, publications encouraging firms to export,

importer and exporter contact databases

While some recent empirical research suggests that EPAs overall do have a positive impact on export

flows, there are many examples of organizations which have failed in meeting their objectives and have

done little to support the competitiveness of exporters. Drawing on a note by de Wulf (2001), following

are some broad principles that determine the effectiveness of EPAs:

1. Ensuring that incentives promote exports / avoiding anti‐export bias: EPAs can be effective only

if the macro‐incentive structure does not create an inbuilt bias against exporting.

2. Autonomous structure: EPAs need to be a policy advocate and also be able to garner and

mobilize resources quickly from both the public and private sector As such, they tend to operate

more effectively when they are established as an autonomous agency with strong private sector

participation on the board but also top‐level political support.

3. Services should be demand driven: This requires strong private sector involvement

4. Ensure sufficient focus on supply‐side / competitiveness: Too many EPAs focus their resources

almost solely on promoting exporters in new markets (e.g. trade fairs). However, ensuring the

export sector is competitiveness should be a first and fundamental priority.

5. Ensure sustainable budget: EPAs must have sources of consistent and sustainable funding. This is

likely to include some degree of charging for services, but in many cases there are limits to this.


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Investment promotion (agencies)

Following the conceptual framework outlined by Wells and Wint (2001) IPAs have four basic functions:

1. National image‐building

2. Specific investment generation: including proactive targeting of investors and “selling”

3. Servicing investment: including converting investment commitments to on‐the‐ground

realization and retaining investment through effective aftercare (facilitating licensing, access to

infrastructure / facilities, etc.)

4. Policy advocacy: working with government to improve the investment climate for FDI

The relative emphasis across these roles will be somewhat context‐dependent, depending on countries,

resources, and government priorities. In most cases, there is a bias toward the investment generation.

The effectiveness of IPAs is dependent on many of the same issues as for EPAs, most important the

broader investment climate, access to a sustainable and sufficient budget, and institutional design that

ensures high‐level political commitment and strong private sector representation.


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Trade promotion infrastructure: Standards and Certification



Main components in standards and certification




Quality Market

penetration

Standards


Quantitative measures of standards performance are limited; and what measures are relevant are

seldom tracked in most low and many middle income countries. As a result, the Diagnostic on standards

will focus almost mainly on qualitative assessment, including both desk and fieldwork. Following is a

summary of a few quantitative metrics that can be included in the analysis.

Indicators Sources

Non‐agricultural ISO certification rates ISO 2008 Survey of Certificates, WDI.

Budget of national quality body and share of budget focused on exporters

Country‐specific

Agricultural Measure of border rejections as a share of exports

Product Risk Index (Cadot et al, 2009)

Share of exporters with HACCP, ISO 22000 or Eurepgap certification

Country‐specific


Interview targets

Government Bureau of Standards: It understands the public quality infrastructure and works with private industry to address quality issues. Capacity various greatly.

Line ministries (e.g. Ministry of Health, Ministry of Industry, Ministry of Agriculture): They have legal responsibility and understand the public system.

Border authorities: Customs, Bureau of Standards, and Line ministries are represented at the border. Interviews with border post personnel provide insight into the export process.

Private sector Exporters: Exporters are the prime source of information. Larger exporters are often readily accessible, but representative information requires interviews with smaller exporters as well.

Exporter/business associations: Many associations exist, often organized by industry. Be aware that the associations often speak mainly for selected larger members. In some countries government influence over associations may be considerable. Associations may also have been set up by donors for specific purposes. Information must be supplemented by exporter interviews.

Private quality service providers: SGS and Bureau Veritas are examples of private service providers. In many countries but not in all they have a local office. They


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have good knowledge of the supply and demand situation for the commercial services they supply such as testing and certification.

Shipping companies/transporters: They are always involved in the export process and will help the analyst to understand the process. They are aware of delays and red tape and of project rejections due to quality problems.

International buyers: Interview with exporters should be supplemented with interviews with their buyers. Occasionally, buyers will be represented locally but phone interviews can be used as buyers may be spread out across the globe.

Other stakeholders Local academics and consultants: In countries with ongoing capacity building projects, local specialists are knowledgeable about both technical and economic aspects as well as the local political economy.

Bilateral donors: Donors support capacity building in quality infrastructure and may have local experts working in capacity building projects.

International organizations: UN technical agencies such as the FAO and UNIDO often has projects on quality infrastructure and may have experts based locally. The experts tend to be technical specialist rather than economists.

Civil society: Local NGOs or international NGOs with local presence are often involved in quality issued. The American NGO TechnoServe, for instance, is often involved in trade and commercialization projects.

Key issues for discussion

see following pages


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Stage Sources of information

Exporters and exporter/

industry associations

Private service providers

Shipping companies and transporters

International buyers Bureau of standards Line ministries Border authorities

1

Create inventory of requirements by export product: Which quality demands do you meet? From where do you learn about standards and technical regulations? How do quality demands vary across your target markets? How important is it to know the exact quality?

Understand requirements of the customers: For which requirements to you provide compliance services For which markets are these services relevant? Which industries do you serve? Are there industries which you normally serve in other countries but not in this one?

Understand export requirements: Can you make a list of quality related documents that the exporter need?

Create inventory of requirements by export product: Which standards and technical requirement do you follow? What are the consequences of non‐compliance? Do you work with your suppliers to ensure compliance?

Understand Bureau role: In which industries is the Bureau active? What is the role of the Bureau in these industries? Are the standards of the Bureau relevant for exporting? Is the Bureau aware of export requirements?

Understand foreign demands for public certification: Is public activity a prerequisite in the export process (e.g. phytosanitary licenses)? For which markets and products? Is this due to domestic or foreign demands?

Understand export requirements: Can you make a list of documents needed for export? Which of these relate to quality?

2 Understand the compliance process and the use of quality services: How do you demonstrate compliance? Could you provide a flow chart of activities necessary to ensure compliance? Which services do you use? How do you access services? What is the source of services? Have you shifted suppliers of services in the past?

Understand the portfolio of compliance services offered: Which services do you offer? Do you work on behalf of domestic companies or their international buyers? Why have you chosen the portfolio you have? Will you expand services in the future?

Understand the export process: Can you draw a flow chart showing the range of activities needed for export? Where do quality issues fit in? Can you provide a list of documents needed? What are the consequences of missing documents?

Understand the compliance process and the use of quality services: What is required to demonstrate compliance? Do you specify use of specific service providers Could you provide a flow chart of activities necessary to ensure compliance?

Understand Bureau role in compliance process: Could you draw a flow chart of the compliance process and indicate where the Bureau plays a role? Which services do the Bureau offer exporters?

Understand government role in compliance process: Could you draw a flow chart of the compliance process and indicate where government plays a role?

Understand the export process: Can you draw a flow chart of the export process? Which steps are relevant for quality issues? Can you provide a list of documents needed? What are the consequences of missing documents?


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3 Understand use of public services: Do you use national standards and public compliance services? Costs of public services? Do you face unnecessary high costs and red tape due to public activity in quality? Is the government helpful?

Understand the competition they face: Do you compete with government or donor subsidized services? What are the regulations that you follow to operate? Does the government fulfill or exceed its role?

Understand interaction with government agencies: Could you specify the role of government agencies in the export process? Do you regard government agencies as helpful or constraining?

Understand use of public services: Do your suppliers use public services? Do you regard government activity as helpful?

Understand Bureau operations: Compare Bureau operations to international best practice! What is the fee structure? How is the Bureau funded? Use of mandatory standards?

Understand government operations: Compare government operations to international best practice! What is the fee structure? How is government activity funded? Role of mandatory standards?

Understand red tape at the border: What is the fee structure? How much time does it take to complete the export process? How much of that is related to quality issues?

4 Views on supply situation: Do you find an adequate supply of services? How does domestic, imported, public and private services compare? What are your preferred suppliers of services? Do you miss export opportunities?

Understand their supply: Why have you chosen the service portfolio you offer? Do you produce all services in country or do you use affiliates abroad? What is the state of the local compliance service industry? Usefulness of public services?

Not relevant Views on supply situation: What is the supply situation compared with other countries? Would you prefer upgrades to the existing situation? Do you specify use of services from specific sources?

Understand public quality infrastructure: Could you explain the organization of the national infrastructure? How does the Bureau interact with public and private facilities?

Understand public quality infrastructure: Could you explain the organization of the national infrastructure? How does your agency interact with public and private facilities?

Understand border organization: Which agencies are represented at border? How much of the paperwork need to be completed at the border and how much must be done elsewhere?

5 Understand alternatives to compliance: What are the costs of non‐compliance? What are the costs of services? Can you shift to alternative markets? What will you gain by improved services?

Not relevant Not relevant Understand alternatives to compliance: What happens in cases on non‐compliance? Are you able to shift non‐compliant products to other markets? At what costs?

Not relevant Not relevant Not relevant

6 Consultations Nor relevant Nor relevant Consultations Consultations Consultations Not relevant


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Analytical approach

Product standards have the potential to impact exporters in both existing products and markets (as

standards and certification requirements change / become more stringent) as well as in new markets or

product ranges, which may require meeting new sets of standards. They impact firms in diverse ways as

well, potentially restricting or facilitating, raising transactions costs, and either restricting or facilitating

investment in innovation (depending on risk perception and thus the willingness of firms to invest in

meeting new standards).

Many international organizations, bilateral donors and agencies working in the quality field have

produced material on how to assess a country’s quality system. Quality is a multidimensional issue, so

contributions often specialize in particular aspects. Gap analysis is the most common technique used to

assess standards systems. In gap analysis, a desirable configuration of a quality system is defined and

the analysis then assesses the current state of a country’s system against this “ideal”. However, gap

analysis suffers from the drawback that the ideal system is not defined according to observed demand.

Most commonly, the ideal system is a description of a developed country system which is beyond the

means of most developing countries, and therefore maybe inappropriate to the needs of the particular

country.

Box 2B.15: Examples of existing handbooks, manuals and diagnostic tools for standards assessment

Guasch, J.L., Racine, J.‐L., Sánchez, I., & Diop, M. (2007): Quality Systems and Standard for a Competitive Edge. Washington DC: World Bank.

ISO/UNIDO (2010): Building Trust – The Conformity Assessment Toolbox. Geneva/Vienna: International Organization for Standardization (ISO)/United Nations Industrial Development Organization (UNIDO).

ISO/UNIDO (2008): Fast Forward – National Standards Bodies in Developing Countries. Geneva/Vienna: International Organization for Standardization (ISO)/United Nations Industrial Development Organization (UNIDO).

ITC (2005a): Innovations in Export Strategy – A Strategic Approach to the Quality Assurance Challenge. Geneva: International Trade Centre (ITC).

ITC (2005b): Building Corresponding Technical Infrastructure to Support Sustainable Development and Trade. Geneva: International Trade Centre (ITC).

IPPC (2010): Building National Phytosanitary Capacity (Strategic Framework). Draft of February 2010. Rome: International Plant Protection Convention.

OIE (2006): Performance, Vision and Strategy: A Tool For Governance of Veterinary Services. Paris: World Organisation for Animal Health (OIE).

Sanetra, C. & Marbán (2007): The Answer to the Global Quality Challenge: A National Quality Infrastructure. Berlin: Physikalisch Technische Bundesanstalt.

UNIDO (2006): Product Quality – A Guide for Small and Medium‐Sized Enterprises. Vienna: United Nations Industrial Development Organization

The main task of the analyst to identify the constraints to the exploitation of the full potential of the

quality system. In doing so, it is critical to distinguish between private and social constraints. For


175

example, companies may complain about the high costs of certification and argue that high costs hurt

their competitiveness. Whether or not this is true in a social sense depends on the cost structure (see

Figure 2B.10). Imagine that certification costs are high due to a government monopoly. Private

companies may be legally bound to use the laboratory of the local Bureau of Standards. The Bureau

operates inefficiently and the costs of testing and certification. A reform of the legal framework for

testing and certification will remove the deadweight loss to the economy represented by excessively

high testing costs. In this case, high certification costs are a constraint to competitiveness. However,

imagine a second scenario. The country in question is a small low income country located far from the

target market. The industry that complains about high certification costs is much smaller than similar

industries elsewhere. In this case, high certification costs are due to low economies of scale. The size of

the local industry precludes investments in testing facilities and the local industry will have to use high

cost imported services. The industry calls for subsidized domestic testing facilities to remove the claimed

constraint to competitiveness. But subsidizing testing facilities in this case is only likely to improve

competitiveness and national income in the long run in the case of an industry that is in the early stages

of exploiting comparative advantage – in many situations, this will not be the case.

Figure 2B.10: Distinguishing between factors influencing competitiveness

It is often difficult to diagnose competitiveness problems without a social cost/benefit perspective in

mind. However, the analysts will rarely have the time and resources to generate the data for a formal

analysis of this kind. The methodological problems of quantifying the costs and benefits of quality are

also substantial even with access to amble resources. Yet, it is important to keep the cost/benefit

Climate Cost of certification due to government monopoly

Costs of certification due to low economies of scale

Factors influencing productivity

Constraints to private competitiveness

Constraints to social competitiveness


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perspective as a guiding principle even for a rapid assessment.

The individual stages of the analysis are presented Table 2B.5 and are discussed in detail below. The

sources of information and the individual stages are linked to the interview discussion guide shown

earlier, which identifies some key issues to cover and provides examples of typical questions that the

analyst will seek answers to. Naturally, as quality issues are highly complex and often country specific,

the sources indicated should be understood as “typical sources” and the questions as prototype

questions – it is up to the analyst to adapt the list of sources and questions to the specific areas of

investigation.

Table 2B.5: Assessing the quality system

Stage 1 What is the foreign demand for quality?

During deskwork, stage 1 analyzes the composition of current exports and the likely quality demands for future exports to get a first impression of the challenges. Does the country exports high value foods or basic commodities? Is the country linked up with global supply chains for manufacturers requiring inputs with exact quality attributes? During field work interviews with private companies and public authorities lay out the foreign demand in greater detail.

Stage 2 What is the derived demand for quality services?

The demand for quality leads to a derived demand for quality services? During deskwork, the analyst may become familiar with common ways of ensuring compliance for present and future exports. During field work interviews the analyst may identify which quality services are in demand and how they are supplied by the quality system. Which quality services (including standards and technical regulations) are demanded business or national regulatory authorities?

Stage 3 Which constraints emerge from the quality system itself?

The quality system provides both opportunities and constraints. Standards and technical regulations are often used as barriers to trade and as vehicles by rent seeking by public and private actors. Badly designed quality policies may produce constraints rather than facilitate trade. The analyst must use field work interviews to listen to the perceptions of the private sector towards government policy and to assess how well the public parts of the quality system operates as compared with international best practice in standard setting and organization.

Stage 4 What is the current capacity for quality service delivery?

During deskwork, the analyst may become familiar with the basic outlline of the quality system. Field work interviews may be used to understand the current system and its limitation in detail. The analysis must include all potential sources including public, domestic private and imported services.


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Stage 5 What are the costs and benefits of improved quality services?

A formal cost‐benefit analysis will not be possible due to resource constraints and methodological problems, yet a cost‐benefit perspective must be used to discuss which issues are truly social competitiveness constraints.

Stage 6 Make a prioritized list of competitiveness constraints

The analyst should aim for a prioritized list of competitiveness constraints. Priorities may be made with the help of stakeholder consultations.

The stages presented here necessitate desk work as well as rapid field work, the latter including 2‐3

weeks of on‐the‐ground fieldwork. The rapid assessment technique is designed to identify specific areas

of focus, which would then most likely be analyzed in greater depth as part of a program of reform.

The area of quality is broad and technically complex. Teams assembled to assess a country’s quality

system will have to reflect the technical complexities. Often representative industries can be selected

during deskwork rather than attempting to cover the entire export sector. This will allow for the

selection of the right technical experts. The desk analysis will rely on existing published material possibly

supplemented by phone interviews with key stakeholders to verify key assumptions made on the basis

of the available material before the field work is begun. The field work will mainly consist of interviews

with stakeholders. Often stakeholders will be able to identify written material such as project and

company reports that the analyst has overlooked during the deskwork phase

Below, we outline the individual stages and discuss the focus of the each stage and the links with

understanding how standards link with competitiveness:

Stage 1 – What is the foreign demand for quality?

The first task is to identify current and potential future export markets. Only by understanding the

quality requirements in these markets may the analyst be able to get a grip of the demand for quality

infrastructure. This stage requires a desk analysis of export trade data as well as a literature study of the

gray literature on export performance and strategies in the country in question. Many developing

countries have formal trade strategies and donors have assisted in the elaboration of detailed studies of

the potential of specific value chains. The Diagnostic Trade Integration Studies elaborated under the

Integrated Framework, for instance, have been produced for many low income countries after a careful

process of stakeholder consultation. The identification of export products and target markets will allow

the analyst to use industry literature to identify likely quality issues.

The desk analysis must be supplemented by the field work. Private sector interviews and interviews with

other knowledgeable stakeholders will reveal the quality requirements that exports must comply with.

The analyst must be aware that compliance is often a relative term. Some buyers may require strict

compliance, that is, non‐compliance will have grave consequences like lost markets while others may


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work with their suppliers to improve quality if problems arise. Given the often complex requirements

that exporters meet, especially in high end segments, many exports will only comply with parts of the

requirements. Industry interviews will reveal the nature of the compliance process.

Both private and public sector actors should be consulted during the field work, but the analyst should

be aware that the degree to which public representatives are aware of private export markets vary

considerably.

Stage 2 – What is the derived demand for quality services?

The demand for quality services is specific. The services that will prove compliance with the

requirements in an emerging electronic industry are totally different from what is needed to comply

with seafood quality specifications. Stage 1 has laid out the export opportunities and the potential

constraints with respect to quality. Stage 2 will link these with demand for specific services. The

experienced analyst will get a good impression of the range of relevant during the desk work. Exports to

specific markets are often linked with the use of the same quality services. However, there is

considerable variation across quality services even for seemingly identical products. The field work is

therefore the primary source of information. Industry interviews with both buyers and sellers will

provide the specific information needed. As an illustration of the degree of precision needed, consider

the export of fresh produce to the EU. The exact nature of the end market targeted is important. Fresh

produce produced for bulk markets in Southern Europe is radically different quality wise from produce

destined for UK supermarkets. Table 2B.6 gives an example of specific quality services and how they

fulfill demands. The analyst must therefore know which quality services are in demand to understand

the constraints to competitiveness.

Table 2B.6: Examples of specific quality services

Compliance Area Needs of the Exporter Necessary Services

Product standards/technical

regulations, including packaging

and labeling

Access to standards/ technical

regulations

Reference centre in standards

body or other

Product testing Conformity assessment

recognized by the (international)

client

Testing laboratory upgrading

towards internationally

recognized accreditation

Accuracy of measurement Internationally recognized

equipment calibration,

measurement traceability to SI

(measurement) standard

Metrology laboratory upgrading

towards internationally

recognized accreditation, inter‐

calibration schemes

Consistent product

characteristics and quality

Enterprise Quality Management

System Certification (ISO 9000)

Certification capacity and

internationally recognized

certifiers


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Management of environmental

impact

Enterprise Environmental

Management System

Certification (ISO 14000)



certifiers

Food safety Management system to control

food contamination (HACCP)



certifiers.

Laboratory/testing capability

Social accountability Insurance of consumer concerns

relating to child labor, workers

exploitation etc (e.g. SA8000, the

Base Code)



certifiers

Examinations of shipment

content to order

Product Inspection Development of cross border

inspection services

Traceability of products and

inputs from farm to fork

Traceability system Development of consultancy

capacity and internationally

recognized certifiers

Source: S. Henson et al (forthcoming)

The analyst involved in stage 2 will face the difficult problem that product and market specific

knowledge necessary to understand quality constraints very often require specific technical expertise. It

is therefore important that the desk work accomplished during stage 1 is done well so that the types of

expertise needed are known early on. It may be necessary to include technical experts for the field work.

It may also be necessary to concentrate on a few representative export products only rather than

attempting to cover all exports in order to get the depth of analysis required.

The sources for stage 2 work is value chain and market specific literature as well as interviews with key

stakeholders notably private sector exporters in the country in question as well as their buyers in the

importing countries. The analyst may often find phone discussions with buyers enlightening as part of

the preparation for field work. There is also a large business literature on supply chains available that

can be consulted. However, the most important source of information remains the private operators in


Some quality demands by be highly codified like the private quality assurance schemes of retailers and

branded product producers such as Marks & Spencer, Nestle, Nike, etc. Often the quality requirements

are set out in great details in readily available in codes of practice and quality management manuals.

However, the analyst should be aware that while such material is very detailed, an insight view on how

it is interpreted is necessary to identify potential quality constraints.

Stage 3 – Which constraints emerge from the quality system itself?

Standards are a double edged sword. Benefits like coordination and market access is enjoyed by those

who comply, but those who do not are excluded or at the least burdened by additional costs. The quality

system provides opportunities for improving social efficiency but does also induce rent seeking by both


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private and public actors. Parts of the quality system are therefore likely to hinder rather than promote

trade facilitation. The analysts should seek to identify these parts as competitiveness constraints.

An example is the practices of the Tanzania Bureau of Standards (TBS) as described in the Diagnostic

Trade Integration Study in 2004. TBS is a provider of various testing services as extensive laboratory

capacity has been established with the help of foreign donors. TBS has the power to make otherwise

voluntary standards mandatory by recommending the Minister of Industry to do so. The opportunity to

force exporters to comply with Tanzanian standards for which they see little use is an issue of great

concern in the business community. International best practice in standard setting and conformity

service provision would recommend that the roles of standard setter, regulatory authority and service

provider are kept separate. The analyst should assess the degree to which such international best

practice are applied in the target country and whether the existing practices open up for rent seeking.

There is growing concern among practitioners in the quality field that the recent surge in donor

investment in quality infrastructure under the pretext of trade facilitation may be used to hinder rather

than facilitate trade. The establishment of laboratories, for instance, creates a potential for the

generation of fees that would help sustain the income of agencies. There is a risk that revenue

generation takes precedence over service provision. Comparisons with international best practice and

industry interviews about the usefulness of government and donor activity will help identify such

concerns.

The analyst may also look at whether some quality‐related tasks are duplicated by various agencies. The

export process may require documentation of quality issues that are either unnecessary or demanded

by multiple agencies. The standard setting process and the degree to which private sector

representation takes place are also important. The fee structure for quality services may help explain

agency behavior as such agencies are very often financially strained. Regulations may be assessed for

their transparency. The export process at the border requires special attention as the understanding of

the documentation required will inform about the efficiency of the process.

Stage 4 – What is the current capacity for quality service delivery?

Stage 4 is where many studies begin as already discussed under section 4 above. The capacity can often

be analyzed using tools produced by specialized agencies as presented in box 2. Most tools however

focus on the national public quality infrastructure and ignore domestic private and imported services.

The analyst should describe how quality services are produced by both public and private actors. The

mode of delivery is important too. These services can be delivered within value chains, purchased from

third parties, produced internally in some cases, and be produced domestically or imported. Very often

an exporter will use a combination of these channels of delivery.

The use of imported services is often an area of conflict with authorities which prefer to see national

system. However, imports are often less costly in particular is nearby countries have a more developed

quality infrastructure. Tanzania, for instance, may access the Kenyan infrastructure, and Mozambique

the South African one. In the highly globalized economy of today, quality services are generally a traded


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service and even OECD countries frequently use service imports rather than opting for domestic

production.

The assessment of the supply of quality services is made difficult by the absence of good indicators that

may be accessed already during desk work. There are no reliable quantitative indicators for quality

issues. This is where the trade analysis of quality differs from traditional trade analysis for which trade

regulations such as tariffs are easily available from international databases. The analyst will have to be

creative during desk work and try to make the most use of the existing but scarce material prior to field

work. Some information may be available depending on the export industries and countries under

scrutiny.

For example, the International Standardization Organization (ISO) publishes a yearly report on the

number of certificates issued by members of the International Accreditation Forum (IAF). The standards

covered are mainly ISO 9001, 14001 and 22000, which gives the requirements for, respectively quality

management, environmental management, and food safety management systems. The ISO survey for

2010 is the 18th survey. The standards counts may be used as an early indicator of the state of the

quality infrastructure in manufacturing. However, the data are not flawless. The survey covers number

of certificates not number of sites certified. Many companies have multiple sites under one certificate.

The survey only cover certificates issues by IAF members. However, certificates are also issued by other

certification bodies and an organization may also choose to implement the standards for their own

internal and external benefit without seeking certification.

Information available of other standards may also be accessed during desk work to learn about the state

of parts of the quality infrastructure. High numbers of advanced food management certificates such as

GlobalGAP and Safe Quality Food (SQF) would indicate a relatively advanced agribusiness sector with

export interests in high end markets.

Regulatory authorities may also produce useful evidence. The analyst interested in the state of animal

products exports to the EU, for example, should consult publically available reports from the EU’s Food

and Veterinary Office (FVO). The FVO regularly monitors and publishes reports on developing country

regulatory systems as any country exporting animal products to the EU must have food management

systems which are equivalent to EU systems. Many countries, like the EU and the US, also register

quality problems at the point of import. However such data are often confidential and may be difficult

to access except for the US. Media stories on product recalls are another source of information about

potential quality problems. Most such information tend to be anecdotal and the nature and extend of

any problems must be confirmed during field work.

Stage 5 – What are the costs and benefits of improved quality services?

The time and resources for desk and field work are unlikely to allow for any rigorous cost‐benefit

analysis. However, the analyst should take care that all costs and benefits have been properly identified

and discussed even though exact quantification may not be feasible. Keeping a cost‐benefit perspective


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is more important that quantification. Without a cost/benefit perspective many competitiveness

analyses degrade into mercantilist statements. The analyst should distinguish clearly between private

and social costs and benefits.

During desk work, the analyst will identify export industries. The analyst may use comparable case

studies from similar industries from other countries to identify the range of costs and benefits to be

discussed during field work. Technical specialists with insights into specific industries and quality issues

will often be able to assist in the identification of costs and benefits at the company level, while social

analysis at a higher level is often the domain of the economist.

Stage 6 – Make a prioritized list of competitiveness constraints

The work of the analyst will be most useful if it includes a good discussion of priority making rather than

a long laundry list of constraints. The analyst should aim for a rough categorization of constraints, for

example in urgent, important and minor constraints. As no quantitative methodologies exists that can

be applied given the constraints in time and other resources, the priority making will be a normative

exercise.

Stakeholder consultations ensure that industry and government share the conclusions of the analyst to

the extent possible. It will also provide an opportunity for error correction as the production of a list of

priorities often stimulates discussion and provokes reactions. Stakeholders are unlikely to react to

abstract and unbinding discussions. When the analyst presents a draft of priorities, extra resources are

often mobilized in particular by stakeholders fearing that their concerns are being ignored. The analyst

may organize a stakeholder meeting by the end of the field work period, however, sensitive issue might

be better discussed during one‐on‐one meetings.

Box2B.16: Analytical challenges and issues for consideration

The area of quality and competitiveness is prone to misunderstandings about how quality infrastructure may improve competitiveness. It is therefore useful to discuss some common misperceptions – these are outlined:

Contributing to competitiveness through standards is not about lowering the private costs of business by subsidized public quality services. It follows that competitiveness is not associated with picking specific value chains as “winners” and subsidizing their access to quality services.

Competitiveness is not necessarily (but it may be) about raising product quality. Increased quality is one approach to supporting export industries which may or may not be successful given the social cost‐benefit ratio of the necessary interventions. Sometimes it pays to invest in quality, but sometimes it does not pay. There is a risk of overinvesting in quality services if the market is unwilling to pay for extra quality. The use of quality infrastructure is mostly not about raising (or lowering) quality. It is about knowing the quality.

Competitiveness is not necessarily achieved by building government quality systems. The government is a major player in quality services in many countries, but it is far from the only one. The role of the government is determined as much by historical tradition and ideology as by income levels. Low income countries tend to have little government intervention in quality systems (mainly due to public finance constraints) but major differences exist even between high income countries. In the US, for instance, the government only provides knowledge to standard setting organization while in the EU, national


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governments have a much more hands‐on approach. Government activities must be carefully designed to complement private activities. This is particularly important in low income countries where the social loss associated with the crowding out of private activity is particularly costly.

Competitiveness is not necessarily about building national quality systems. Many services may be imported either through buyer relationships or as third party services. Often these imports are costly but so is the establishment of national systems. Low income countries are at a disadvantage simply due to the small sizes of their economies and often due to their isolation.

A quality infrastructure is no necessary condition to achieve competitiveness. Often quality infrastructure in discussed in absolute terms like “The use of standards is increasingly becoming a prerequisite to worldwide trade“. This may be correct, but not all standards are the same. Some are simple easy to meet, some are complex and require support infrastructure in the form of technological hardware (e.g. laboratories) and software (e.g. a cost efficient value chain such as vertically coordinated chains). Only some developing country exports are of the latter variety. The choice of which type of market to aim for is a social cost‐benefit consideration. Exports are generally follow the principle of comparative advantage. Each country will end up exporting what it does relatively best. Part of the basis for its export performance is the nature of its quality system. If the country performs badly in this regard, it will end up exporting goods and services that rely little on quality services.

Competitiveness in quality is not necessarily about harmonizing with international standards. The WTO SPS and TBT agreements have caused some confusion about the appropriate role of international standards. Compliance with these two trade agreements are made easier if a national standards is based on international standards. Yet, this does not warrant the blind import of international standards. Countries are still free to choose whichever standards they fill fit for their situation as long as the standards are backed by a risk assessment. The use of international standards only makes the risk assessment process a little easier. The choice of appropriate standards is a cost‐benefit consideration. If a country deviates significantly from the countries for which an international standard has been develop, the import of the international standards is likely to lead to an economically inefficient situation. Furthermore, international standards abound. Many institutions develop international standards and the choice of one particular international standard therefore does not necessarily guarantee a perfect match with the demand of the customer. Only the customer can formulate the need for a standard, not an international trade agreement. The trade agreement sets some parameters for the use of standards, commercial relationships determine the standard.

Standards (and quality infrastructure) is not the same as quality. The instruments of standards, technical regulation and the underpinning quality infrastructure are often mistaken for quality itself. Quality is a much broader concept. It helps to distinguish between producing quality and proving quality. Quality infrastructure is mainly about the latter. Producing quality takes basic capacity building in the value chains through means such as training programs, extension and advisory services, new technology, etc. If a first investigation demonstrates a low quality level of the exports of a given country, the reason is often a lack of capacity to produce quality in the supply chain.


Standards tend to be driven by requirements in end markets – as such, the assessment of standards

needs to take into account the markets being targeted by exporters. Indeed, any diagnostic assessment

of how a country’s quality standards system contributes to trade competitiveness must take into

account not only the supply side, but also the demand side of quality standards. In high income end

markets, pressures from consumers (for high quality, differentiated products) governments (for health

and safety protection) and civil society organizations (on ethical and environmental issues) has

contributed to a steady increase in the range and stringency of standards to which exporters must


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comply. When selling into lower income markets, however, the demand for standards tends to be less

clear, but often less rigorous. Recent research (Kaplinsky and Farooki, 2010; Kaplinsky, Terheggen and

Tijaja, 2010) suggest that standards play a much less important role in exports bound for lower income

markets (see Box 2B.17).

Box 2B.17: Standards in South‐South trade

Thailand’s cassava exports

Thailand’s exporters of cassava pellets to the EU are required to meet two demanding sets of standards ‐ GMP (Good Manufacturing Practice) covering sanitary and processing procedures, and HACCP (Hazard Analysis Critical Control Point) as cassava pellets are an input into animal feeds. By contrast, their exports of dried cassava to China are not subject to either GMP or HACCP certification, but only require a minimum level of starch‐content (Tijaja, 2010). Gabon’s timber exports

Gabonese timber exporters selling into the EU and China face very different markets in terms of standards (Terheggen, 2010). Entry into Europe is covered by much more intense standards, both private standards specified by global buyers, and mandatory standards set by governments and international bodies. These differences are illustrated in the figure below:

Source: Kaplinsky, Terheggen and Tijaja, 2010



Light manufacturing

Focus on product safety and consistency

Standards will be strongly driven by end markets and / or lead firms in global value chains, however can be strongly influenced by in‐country quality systems

Standards will be highly sector specific

Both process and product related standards should be included

Emphasis on testing facilities, role of local Bureau of Standards, overall certification costs

Agriculture Main emphasis on health (food safety) and environmental issues

Focus on sanitary and phytosanitary standards as well as process‐related hygiene

Private

0.0

1.0

2.0

3.0

4.0

5.0

Legality certificationrequirements

GPP

Sustainability certificationrequirements

ISO standards

EU

CN

International

0.0

1.0

2.0

3.0

4.0

5.0Formaldehyde emissions

Phytosanitaryrequirements

Product testingrequirements

Building codes

EU

CN


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standards (e.g. HACCP)

For some agricultural products, issues of certification (organics) and traceability (e.g. Eurepgap) will require significant technical capacity and considerations of compliance costs

Key government agencies will be linked with Ministries of Health and Agriculture / Environment

Tourism Standards and certification usually include both government and private processes

Safety standards of primary concern (from government regulatory perspective), but quality and consistency of service offerings tend to main focus of private initiatives


Importance of ISO (9000) but also many industry specific standards (ICT; BPO services)

Importance of professional certification schemes – e.g. software engineering (SEI)

Background reading: relationship between standards and trade competitiveness

Standards are essentially descriptions of the quality parameters of a product. New public safety threats

such as food safety hazards and the emergence of ever more complex global supply chains with an

associated increased demand for the interoperability of inputs create a strong push for knowing the

exact quality of traded products. For instance, the consumer wants to know the content of cancer‐

causing aflatoxins in peanuts and the power companies need to know the strength of cables produced

abroad. In short, standards are used to transfer product information from seller to buyer. This is not

easy. The standard itself is simply a document outlining the desired characteristics. In order for the

standard to be credible a compliance infrastructure is needed. For some issues, such as food safety, the

public has a key interest and the government is often involved. In that case standards are often referred

to in legislation and the resulting document stipulating quality is known as a technical regulation. But for

many other issues, standards and the use of compliance infrastructure are purely private matters and all

exchange of information about the nature of the product take place efficiently on the basis of private

transactions. Many activities are part of the quality infrastructure. Standards and their regulatory

counterpart, technical regulations set out the specifications but a range of quality services are part of

the picture too.

Box 2B.18: Definitions

Quality – the value of a set of parameters that describe the nature of a product, service or management system. An apple, for instance, is a fruit with edible flesh, certain sugar content, a given color, etc. There are many apple qualities differentiated by, for instance, sweetness or color. Some qualities may be ranked on a low to high quality scale, others cannot be ranked but are fit for different purposes. An economic understanding of quality should not talk about low and high quality but efficient quality that is the quality that produces the highest benefit/cost ratio.

Quality services – all services relevant to establish the values of the parameters that describe the quality of a product, service or management system. These are the instruments of standards and technical regulations and conformity services.

Quality infrastructure – the institutions and technologies used to provide quality services. The term relates to all the fields of metrology, standardization and testing, quality management and conformity assessment,


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including certification and accreditation. Often the term MSTQ (Metrology, Standardization, Testing and Quality assurance) is used interchangeably with quality infrastructure.

Standard – a formal description of the desired quality of a product. Standards are voluntary and many standards often compete.

Technical regulation – a mandatory formal description of the desired quality of a product. Technical regulations are often created by referring to a standard thereby making it mandatory.

Conformity assessment – activities concerned with determining that requirements laid out in a standard or technical regulation are fulfilled. Conformity assessment includes the areas of testing, surveillance, inspection, auditing, certification, registration, and accreditation.

Conformity assessment services – services used to ensure conformity with a standard or technical regulation.

For low income countries in particular, the emergence of standards as a form of governance in

global trade raises some threats, most importantly the risk of being excluded from profitable

markets – three distinctive and related characteristics of standards as a barrier to global trade

(versus traditional barriers like tariffs and quotas) include:

1. Unlike tariffs and quotas, they are not just established by governments, but also involve a range

of private actors.

2. Unlike tariffs and quotas which are publicly codified, many standards are opaque. The rules and

regulations which producers have to meet are often neither widely publicized nor stable and

consistent.

3. Unlike tariffs and quotas where there are established mechanisms to resolve conflicts (for

example, the dispute resolution procedures under the WTO), the determination of performance

with respect to standards is generally an asymmetric process, determined solely by the buying

party or country, with the producer having little capacity to challenge decisions on

conformance.

But standards also offer an opportunity for producers to access high margin markets. Indeed, standards

have the potential to shape a number of aspects of export competitiveness. The channels through which

standards shape competitiveness are summarized in the remainder of this section.

Product compatibility

A well functioning quality system improves market coordination by ensuring product compatibility. This

is a key issue behind the rapid growth in global trade. Standardization ensures that inputs produced in

distant locations fit together when assembled in the final product. This is often done by referring to

voluntary standards and using private conformity assessment services such as testing and certification.

Occasionally, the government intervenes to direct the choice of product variety towards a social

optimum that market participants are unwilling to reach themselves. In an export context, the drive for

product compatibility often translates into complying with standards set up by global buyers.

Market access

Standards also help create market access by ensuring that the product specifications are aligned with


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foreign demands which may be public regulatory requirements or private market demands. The EU

seafood regulations, for instance, are highly demanding both in terms of product standards and

management practices. So are the regulations of the US. Vietnamese seafood exporters frequently

export to both markets. The Vietnamese authorities with the assistance of Danida, the Danish

development agency, have designed national standards that combine the EU and US demands ensuring

that complying with the Vietnamese standards ensures compliance with both EU and US demands

simultaneously.

In some cases, standards also help shape and develop markets. The competitiveness of a country or

industry is then influenced by the ability to participate in the standard setting process. The rapidly

developing biofuel market is an example. Quality issues include chemical composition to ensure

compatibility with existing stock of combustion engines, environmental parameters to ensure a positive

effect on climate change and social parameters to guarantee ethical behavior of biofuel producers.

Environmental and social parameters are important to ensure market access into markets like the US

and the EU. The ability to follow the standard setting process and, if possible, to influence, may be a key

factor when a country wants to ensure that its emerging industry complies with regulation. Rules on

forest clearance, for example, may exclude countries which have recently converted forests into

agricultural lands as opposed to most developing countries where this conversion took place centuries

ago.

For exporters, compliance to international product and process standards can open doors to important

markets. The flip side, of course, is that firms which fail to comply risk being excluded altogether from

global value chains.

Quality signaling and value addition

The market access aspect of standards is linked to the widespread use of standards as the basis for

technical regulations. The right product specifications (formulated as either voluntary standards or

mandatory technical regulations) safeguard human, animal and plant life and protect the environment.

The gap in regulations are widening between developed countries and many developing countries when

it comes to environmental and social issues such as labor practices. Private operators also expect

production and trading practices to comply with various codes of practice in many markets. The quality

system must be able to meet the demand for understanding new requirements and proving compliance

with them in a cost effective way if industries are to remain competitive.

Developing countries are most often standards takers rather than setters. That is their exports must be

compatible with quality demands determined elsewhere. For example, following emerging international

standards on the chemical composition of biofuels ensures Mozambican exporters a market as their

product is compatible with car engines in export markets. The biofuel standard creates a network effect.

The value of Mozambican biofuel increases with the number of people using compatible technologies.

Awareness of emerging standards therefore becomes a key factor in a competitive industry as market

participants must lock into the right technologies as soon as possible.


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Standards can also identify specific product attributes and add value to exports by allowing producers to

be rewarded for their efforts when producing them. In this way, standards allow exporters to tap into

their willingness to pay for specific product attributes by assuring them about the nature of the product

that is traded. For example, most African agricultural is de facto organic as chemicals are little used due

to their high costs. However, the average consumer does not know this. Organic labeling communicates

the information to the consumer.

Cost – scale economies and efficiencies

Standards impact firm cost structures, and therefore product prices, in a variety of ways. Product

compatibility makes long distance trade and the inherent specialization possible which leads to national

and global gains of economies of scale. In an emerging industry many product configurations may exist,

but agreeing on one configuration will allow private operators to mass produce compatible inputs

thereby reaping greater economies of scale. For example, common regulations on pesticide use will

allow extension agencies to advice on the same set of pesticides acceptable in export markets. This is

less costly than having to fine tune crop protection management to individual market demands.

Meeting standards is generally a costly process, and this can act as a barrier to entry for small‐scale and

informal producers (see further discussion below) On the other hand, in many cases firms adopting the

various sets of standards required to access global markets have experienced considerable

improvements in both process and product upgrading. Meeting the needs of demanding corporate value

chain leaders to enhance quality, cost, and delivery has invariably meant that firms have had to change

their practices on inventories (reducing working capital costs), to restructure their plant layouts, to

move from quality‐at‐the‐end of the line to quality‐at‐source and to introduce new equipment which

boosts productivity and enhances product quality (Womack and Jones, 1996). Similarly, firms

participating in global value chains which require conformance to civil‐society driven standards on

health, safety, work‐practices and the environment are generally able to participate in high‐margin

niche markets.

There is an important caveat here, however, since as in the case of ISO Standards, the adoption of

process standards may provide the capability to enhance productivity and reduce costs, but this

capability may or may not be utilized to achieve these ends. Firms may be able to monitor quality

performance at each stage of the production cycle through the use of ISO9000 procedures, but unless

these performance indicators are actually used to “stretch” efficiency – through setting and meeting a

series of targets for systematic improvement – the achievement of standards accreditation will have

little impact on a firm’s capacity to upgrade.

Innovation

The right standards are codified specifications of state‐of‐the‐art technology and best practices in

meeting consumer expectations. Standards are platforms on which to add new insights. As the world

changes, new standards are introduced to reflect latest technologies, innovations and community needs


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and redundant standards are discarded. The role in innovation in developing countries is often to serve

as a channel of diffusion of ‘cutting edge’ practices as these countries catch up with developed

countries. Often the knowledge built into standards is transferred through the global supply chains that

link up distant markets. In Kenya, knowledge about food safety management has been transferred

through the country’s successful fresh produce exports. New innovations such as pre‐packed vegetables

and ready‐to‐eat salads have been created using food safety management standards as the underlying

basis. These standards ensured final products were acceptable in end markets and concentrated

innovation efforts.

The costs of achieving standards

Even though there may be a payback to the firm in effectively implementing standards arising from

higher product prices, lower costs and larger volumes (due to selling to large‐scale buyers), the

achievement of standards will not be costless. The financial costs of accreditation itself may be low, but

there will be resource costs in acquiring, and then maintaining accreditation – managerial time, training,

new procedures and new equipment. Moreover, there may also be significant “lock‐in costs” when

suppliers invest heavily in meeting the specific standards of a particular firm (as in traceability in

horticulture, where different retail firms have different types of paper‐trails), and may find it costly to

make the switch to a different lead‐buyer’s standards procedures.

These costs will necessarily vary across industries. Achieving the standards required to sell into the

defense sector will obviously be orders of magnitude more costly than those involved in the certification

of organic coffee. See Box 2B.19 for an example of compliance cost differences across industries.

Box 2B.19: Sectoral differences in compliance costs

Gabonese Timber Industry In the Gabonese timber industry, one large forest holding reported the cost of acquiring initial FSC certification (which requires action through the chain of production) at €4m, with an annual cost of maintaining accreditation of around €100,000. A second Gabonese firm estimated its environmental compliance cost at €2.10 per hectare, in the context of an estimated minimum economic forest‐holding of 50,000 hectares. A third large forest‐holding company estimated the cost of achieving the CFAD (Sustainable Forest Management accreditation) to be in excess of €1.5m. Source: A. Terheggen, personal communication

Malaysian Electronics Industry By comparison the cost of compliance to health and safety and the ISO14001 environmental standard in the Malaysian electronics industry was considerably lower. A large MNC estimated the annual costs of maintaining its ISO14001 certification and the international occupational health and safety management system standard (OHSAS 18001) certification to be around $4,600. A second MNC reported the cost of OHSAS certification to be $278 per annum. Two second‐tier suppliers estimated the costs of maintaining ISO14001 accreditation at between $4,600 and $9,275 per annum. Most of these cost estimates however are based on previous investments by the firms in setting in place the processes and procedures for certification and these relatively low cost‐estimates only relate to the annual costs of maintaining registration. Source: Kaplinsky (2010)


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The key issue in considering the costs of standards‐accreditation is thus best seen in relation to the size

and financial viability of the suppliers involved. While these levels of expenditure may be affordable to

MNCs or large locally‐owned suppliers, they often act to exclude smaller‐scale suppliers. One reason for

this exclusion is the financial cost. Therefore in the Thai cassava value chain, a number of smaller plants

have had to withdraw from exporting to the EU as the costs of achieving GMP and HACCP accreditation

are too high. These firms reported that it was not just the cost of accreditation itself, but that HACCP

implementation requires trained staff and the maintenance of records (Kaplinsky, 2010). A second

reason why small‐scale – and especially informal sector – firms may be excluded from participating in

global value chains is that they lack the capacity and culture to systematically record and store the

information required to achieve and maintain standards accreditation.

Therefore, because of a combination of acquisition costs, costs of maintaining accreditation and the lack

of capabilities to implement and sustain accreditation, the advance of standards in global value chains

excludes many small‐scale and informal sector producers from global markets.

Main components of standards analysis

Two main types of standards can be defined – product and process:

Product standards: Product standards address the characteristics of the output from production.

They are relatively unambiguous, and are defined by the quality requirements set by particular

standards‐setters. For example, in the case of standards set by lead firms seeking to reduce

costs and increase flexibility, this may involve the definition of minimum levels of permitted

defects. Thus, in the auto sector, permissible levels of defects which suppliers must achieve

have been progressively reduced from 10,000 parts per million to less than 400 parts per

million. In the food‐retailing sector, the product standards which are tested include pesticide

residues. In a relatively new development, Walmart is increasingly focusing on green‐standards,

including on the carbon content of products which it sources from its supply chain. In general,

these product standards are unambiguous and require single‐point verification at the end of the

production process.

Process standards: Process‐standards are more complex and more varied than product

standards:

o They are more complex because they typically involve the documentation of procedures

involved throughout the production process rather than measuring a single outcome (as

in the case of a product). For example, the International Standards Organisation (ISO)

quality and environment standards (respectively the ISO9000 and ISO14000 series)

require the documentation of practices and outcomes at various stages of the

production process. Unlike product standards, they do not set the levels which must be

achieved, but only require that these levels be checked and documented.

o They are more varied because in some cases they include both the documentation of

procedures and the achievement of clearly defined and measured outcomes. This may

involve indicators such as the level of the minimum wage, the age of workers and the


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rights of workers to engage in collective bargaining, as well as the introduction of

processes to minimize hazardous work practices.

o They are more systemic than product standards because they typically involve the

documentation and/or achievement of standards throughout the chain. For example,

the Forestry Stewardship Council (FSC) certification which addresses sustainability in the

timber and wood products value chain involves a chain of custody which follows the

timber from its forestry cultivation, through the sawmills, the manufacture of processed

wood, and in transformation into furniture and other final products. A similar process of

verification is required throughout the chain if producers are to meet the demanding

pesticide‐residue requirements of global retailers, who demand that a defaulting

shipment can be traced back all the way to the individual plot of land in which a

particular leaf in a salad was grown.

It is not always possible to separate product from process standards. For example, is organic food a

product standard (whose characteristics can be measured), or a process standard (the documentation

throughout the chain that inorganic materials are not entering the chain)? In most cases, therefore,

particular product standard outcomes require the application of particular process standards. But the

obverse is not always the case, that is, given process standards do not necessarily produce the targeted

product standards. For example, the ISO quality and environmental standards only specify that pertinent

information is systematically collected which will make it easier to achieve given product standards. But

it is entirely possible – and indeed often the case – that producers have achieved the required process

certification, but that this is not used systematically to improve quality and environmental performance.

Four major sets of actors are involved in the setting of standards – private sector actors, governments,

civil society organizations and international industry bodies. These actors, and their roles, are outlined in

Table 2B.17.

Table 2B.7: Actors in standards setting

Actor Role

Private sector Individual lead firms have developed standards to determine the efficiency of their value chain operations. Initially these corporate standards largely defined the nature of the product and were generally unique to the firm. But in some cases, firms began to co‐operate to widen the pool of suppliers on which they could draw. The Global Partnership for Good Agricultural Practice (GLOBALGAP) is one such example. GLOBALGAP is a private sector body that sets stringent standards for the certification of production processes of agricultural products primarily for food safety purposes. The standards are voluntary in principle but the fact that some large buyers such as British supermarkets use them have made them de facto mandatory in some markets. Another example is in the automotive industry, where ISO‐TS16949 has now been adopted globally, replacing country‐specific standards. In addition to focusing on flexibility, inventories, quality and cost and focusing on product standards, lead firms have increasingly also needed to respond to civil society pressures on labor standards and the environment. One example is the Marine Stewardship Council (MSC) which sets standards for environmentally sustainable fishing. The electronics industry adopted the Electronic Industry Code of Conduct (EICC), based


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Actor Role

on the HP Supply Chain Social and Environmental Responsibility Code of Conduct, to replace company‐specific codes, following a campaign by civil society organizations which exposed poor working conditions in the industry’s global supply chains.

Government Unlike corporate sector standards where suppliers can perform at differential levels (and where they may be rewarded or punished for over‐ or under‐performance) government‐legislated standards are mandatory, transparent and provide little leeway to producers. Government standards can also vary in their sectoral purview. For example the USA mandates Hazard Analysis and Critical Control Point (HACCP) certification (which requires processes to reduce the risk of contamination in food production) for imports of juice and meat, but for other foodstuffs conformance is voluntary. With growing international cooperation, particularly in Europe, many legislated standards are no longer set by individual governments, but by groups of governments, as in the case of standards set by the European Union Commission. For example, the EU has adopted a suite of standards governing the “farm‐to‐table” chain, targeting a series of linked product and process standards governing food safety, animal health, animal welfare and plant health. These cover both domestic firms selling into the EU and exporters to the EU. In addition, governments agree to multilateral standards – for example WTO SPS agreements. Members states are encouraged to base their technical regulations on international standards, although they may chose to deviate from such standards, if they find that they are inappropriate in the local context. The SPS agreement defines international standards for food safety, animal and plant health as the standards set by, respectively, the Codex Alimentarius, the International Office of Epizootics and the International Plant Protection Convention.

Civil society organizations

Unlike either the standards which pertain in corporate‐governed value chains or those standards set by national and international governmental bodies, civil society standards are voluntary. However, this does not make these standards less important, particularly if producers are seeking to sell into higher‐margin niche markets. Many of these standards fall under the Fair trade umbrella, covering items such as foodstuffs (for example, coffee where the emphasis is on ensuring minimum incomes for producers), intermediate products (such as organic cotton and FSC timber, covering environmental issues) and final consumer goods (such as apparel, addressing labor standards). Although still a small segment of the global market for these items, the pressures leading to the adoption of Fair trade‐type certification are forcing many value chains to adopt their own, or other analogous standards in their value chains. One example of this is Starbucks which has adopted a non‐Fair trade scheme to regulate its supply chain (The Rainforest Alliance). Unlike Fair trade which explicitly targets minimum prices paid to farmers and other socio‐economic standards, the Rainforest Scheme focuses on environmental and sustainability issues. Similarly, Walmart which, under pressure which it has tried to resist on labor standards, has struck‐out against criticism by pushing through a series of greening standards to its supply chain, involving 2nd and 3rd tier suppliers (with chain‐of‐custody type accreditation) as well as 1st tier suppliers.

One of the major difficulties with the standards driven by civil society organizations is that there are a plethora of confusing and overlapping standards which confront producers. This arises as a direct consequence of the multiplicity of civil society organizations which are involved. Thus, in the apparel industry, many producers in low‐income economies are involved in a costly and often bewildering process of multiple audits of their labor standards as each of the lead‐buyers bows to pressures from


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Actor Role

particular civil‐society organizations in their different final markets. Therefore in some cases large global branding firms have approached neutral bodies like the International Labour Organisation to develop a single globally‐recognized and transparent labor standard which they can apply to their value chains and meet the demands of civil society organizations across their final markets

International industry bodies

International industry bodies are involved in both general and industry‐specific standards setting. For example, the IS09000 quality standards grew out the UK British Standards BS5750 certification scheme to address an international audience of participating firms. ISO standards generally cover a range of sectors, since they target internal processes; hence ISO9000 certification has been adopted in manufacturing as well as services and marketing companies. In other cases, these international standards‐setting bodies are industry‐specific. For example, the International Maritime Organisation (IMO) has grown into the major body regulating practices and safety in the shipping industry. Its explicit purpose is both to safeguard transport and to prevent “unfair competition” from low‐cost and less scrupulous shipping lines. In cooperation with governments and civil society organizations, this has resulted in a series of standards, such of which have been enacted into law by most governments, and others which are considered to be beneficial and which are advisory.

The other key actors in the standards process are the providers of quality services. Conformity

assessment and other quality services may be provided from both public and private actors. Many

exporters do some tests and quality control themselves (first party assessment), are tested and/or

audited by their buyers (second party assessment), and buy services from neutral actors (third party

assessment). When quality is regulated by mandatory technical regulations, government agencies in the

importing country and even occasionally in the exporting country often get involved. A myriad of private

actors offer quality services ranging from global quality service giants like the SGS and Bureau Veritas

with offices in many countries to small companies specialized in particular services. Many national

bureaus of standards also offer conformity assessment services. The global quality system is marked by

both competition between service providers who offer standards and the associated conformity services

and attempts to harmonize standards and compliance procedures. The tradeoff between competition

and the specialization of services resulting from this and harmonization is difficult to achieve, yet the

right balance is often crucial for trade concerns.


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Trade Promotion Infrastructure: Special Customs Regimes and SEZs



Main components in special customs regimes and SEZs




Quality Market

penetration

Duty drawback and manufacturing‐in‐bond

Export processing zones and Special Economic Zones


Indicators Sources

Duty drawback and MUB Share of exporters making use of duty relief regimes Country‐specific

Export processing zones /

SEZs

Share of exports from SEZ Country‐specific; PRMTR

database

SEZ exports per capita Country‐specific; PRMTR

database

# of SEZs Country‐specific; PRMTR

database

# of companies operating in SEZs Country‐specific; PRMTR

database

Clusters and collective

action

Existence of national cluster programs Country‐specific

Subsidies and incentives to sectors and exporters

Existence of subsidy programs Country‐specific

Share of exporters benefiting from subsidies Country‐specific

Cost of subsidies (actual and % of export value) Country‐specific

WTO actions over past x years WTI


Interview targets


Duty drawback and

MUB

Customs and Excise Other border agencies (police, health,

etc.) Ministry of Trade and Industry or other

ministry with responsibility for scheme


Export councils or associations Private sector administrators or service

providers to drawback schemes

Export processing SEZ regulatory authority Private SEZ operators


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zones / SEZs Ministry of Trade and Industry or other ministry with responsibility for SEZ program

Customs and other border authorities Port operators

Investors operating in SEZs


Duty drawback and

MUB

What duty relief regimes are offered and why? Do exporters (of all sizes) make appropriate use of the regimes? What is their approach on the balance of trade facilitation and risk management? What are the main challenges they face and how are they addressing them?

Export processing

zones / SEZs

How effective have SEZs been in attracting export‐oriented investment? Structure of the SEZ regulatory authority: links to government ministries? structure

of executive board and level of private sector participation on the board? Are the SEZs operated publicly, privately, or both? What is the strategy for this/ What are the challenges in delivering on: infrastructure, “one‐stop” registration,

efficient customs, etc.? What are they doing to address these? Is there any evidence of the SEZs linking effectively with local producers – e.g.

supplies coming from local markets, contributing to indirect exports?


Duty drawback and

MUB

What duty relief regimes do they make use of and why? How effective are the regimes in terms of: registration, paperwork requirements,

financial commitments and repayment times? What are the main problems that arise with the regime and how could they be

improved?

Export processing

zones / SEZs

How does SEZ the investment environment for exporters compare to what would be available outside the zones? – in infrastructure, transport access, regulatory burdens, set‐up, etc.

Are incentives offered within the SEZs? How important are they? What are the main issues that still constrain exporters on a day‐to‐day basis? Do investors make significant purchases from local suppliers? What restricts greater

links with local suppliers?






May have limited scale through which to support clusters in many industries – critical that sectoral support tightly matched with comparative advantage

Resource‐rich Emphasis on use of trade promotion tools to support diversification

Role of subsidies and incentives may be important to probe – how effective is the incentive structure in facilitating investment in sectors where the country has comparative advantage?


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Role of EPZs / SEZs may be important

Middle income Often the main issues will focus on adjustment processes and moving to higher value‐added activities – how does the incentive system, and the wider programs of trade promotion support facilitate efficient adjustment (toward sources of comparative advantage) v support traditional sectors

Emphasis on cluster support to facilitate innovation and upgrading



Light manufacturing

Duty drawback particularly relevant for sectors with substantial imported inputs (e.g. garments, electronics, automotive)

SEZs May be a critical issue to explore; in many countries/sectors the majority of exports will be based in zones

Infrastructure, regulatory frameworks, and incentives policies of SEZs must be understood

Agriculture SEZs possible area of interest for consolidating agricultural value chains; particularly when land is scarce

Tourism Increasingly being integrated into SEZ projects, but unlikely to be a major area of focus


Assess effectiveness of IT and Science Parks infrastructure and services; location (nearness to skilled labor) often a critical issue

Background reading: relationship between special customs regimes & SEZs and trade

competitiveness

A majority of countries provide support to exporters through duty deferral / drawback or through a

spatial program like EPZs or SEZs. While these interventions can all be defended as addressing some

form of market, information, or coordination failure, it is by no means certain they represent efficient or

effective mechanisms to promote trade competitiveness. It can be argued that some of these

interventions are in fact distortions to competitiveness which may harm trading partners or create an

un‐level playing field within the country. On the other hand, they address constraints that hinder

investment and trade. Table 2B.8 provides a brief summary of the purposes, rationale, and potential

impact on competitiveness of these interventions.

Table 2B.8: Summary of special customs regimes and economic zones

Purpose Reason for government provision

Potential impact on competitiveness

Duty drawback and

manufacturing‐in‐

bond

Allows exporters to access imported inputs for exports on duty‐free basis

Reduce anti‐export bias of tariff regime

Lowers production costs for exporters

Allows for access to higher quality inputs


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Export processing

zones / SEZs

Provides exporters with an environment of: high quality infrastructure, more liberal environment, improved administration, and possibly fiscal incentives

As above and overcomes poor investment climate more generally

As above Improves quality and flexibility (speed) of production and distribution

Duty drawback and manufacturing‐under‐bond

Most countries have established duty relief or exemption schemes designed to promote competitive

exports reducing or removing taxes on imported inputs for use in further export‐oriented

manufacturing, through either duty drawback or manufacturing under bond (MUB) regimes. The

rationale for specific exemption or duty relief for exporters is that the imposition of a tariff on imported

inputs acts as a tax on exporters, which may reduce the competitiveness of exporters in world markets.

Fundamentally, duty drawback and MUB regimes provide the potential for exporters to improve

competitiveness through both cost (access to lower cost inputs) and quality. To the degree that they

facilitate imports of higher technology inputs that might be available in the domestic market, they offer

the potential to improve aggregate productivity through knowledge and technology spillovers. However,

the administration of such schemes is sometimes problematic and so their existence alone does not

necessarily contribute to competitiveness. Indeed, it is recommended that duty and tax exemptions for

exporters be kept to a minimum in order to reduce the burden on customs administrations.

Export processing zones and special economic zones

Special economic zones (SEZs)57 are demarcated geographical areas within a country’s national

boundaries where the rules of business are different – generally more liberal – from those that prevail in

the national territory. SEZs act as a tool of trade and investment policy, aiming to overcome barriers that

hinder investment in the wider economy, including restrictive policies, poor governance, inadequate

infrastructure, and problematic access to land.

Specifically, SEZs tend to offer export‐oriented investors three main advantages relative to the domestic

investment environment. First, they generally offer a special customs environment including efficient

customs administration and (usually) access to imported inputs free of tariffs and duties. Second,

historically at least, zones have offered a range of fiscal incentives, including tax holidays, exemptions,

and reductions, as well as unrestricted movements of capital and repatriation of profits. Finally, special

economic zones aim to offer a high quality investment climate, one which is a marked improvement

over what is available in the country overall. By concentrating on a relatively narrowly‐defined area,

SEZs make it more feasible to deliver a high‐quality investment environment – from the perspective of

financial investment, governance, and delivery capacity – than may otherwise be possibly across the 57 The term “SEZ” is being used here in a generic sense to cover any one of a variety of similar regimes including “industrial free zones”, “export processing zones”, “maquiladoras”, “investment promotion zones”, “foreign trade zones”, “free zones”, and “wide area special economic zones”.


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economy as whole.

Main components of interventions

In analyzing a country’s program of sectorally and spatially targeted support to the export sector, it is

necessary to assess the specific components and activities involved in each instrument of support – a

summary of these components follows below.

Duty drawback and manufacturing‐in‐bond58

A wide range of possible approaches to duty and tax relief on imported inputs for exporters; however,

two main mechanisms are of most interest:

1. Duty drawback: Under a duty drawback regime, the exporter pays full duty upon importing the

relevant good, but then can claim back a refund based on filing specific information on the

content of their exports.

2. Manufacturing under bond (MUB): This mechanism is particularly relevant for exporters who

make substantial use of imported inputs. MUB is similar to a duty drawback, but in this case the

imported input remains under bond until it is processed and re‐exporter. Thus, the exporter is

not required to pay the duty for each individual importation, although exporters are usually

required to maintain a credit with Customs as financial security against the value against the tax

liabilities that would otherwise be payable for the imported raw materials. An MUB scheme

requires that the raw materials be kept within a specific bonded warehouse or factory that has

been licensed by Customs.

Box 2B.20: Kenya’s Manufacturing Under Bond Program

Kenya maintains a Manufacturing Under Bond (MUB) program that is designed to encourage manufacturing for export by exempting approved applicants from import duties and VAT on the raw materials and other inputs that they import and also providing a 100% investment allowance on plant, machinery, equipment and buildings. If the goods that are produced from the raw materials and other inputs are not exported the scheme’s participant is subject to a surcharge of 2.5% and the imported inputs used in their production are subject to all other duties. Under this scheme “manufacture” includes any process by which a commodity is finally produced. This includes assembling, packing, bottling, repacking, mixing, blending, grinding, cutting, bending, twisting, joining or any other similar activity. The remission is, however, not available for the importation of plant, machinery, equipment, fuel and lubricants, or in respect of suspended or dumping duty. The scheme can be utilized by both direct exporters (that is, manufacturers who import raw materials, manufacture, and then export the finished product) and indirect exporters (that is, a manufacturer/producer who imports goods for use in the production of goods for supply to another manufacturer for use in the production of goods for export). Application for participation in the scheme must be supported by a bona fide export order or contract for specified export goods or a letter of credit; a detailed production plan; a list of imported goods including their

58 The discussion here is drawn from World Bank (2009a)


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description; and the tariff classification, quantity, value and amount of duty/VAT to be waived. Furthermore, the value of the imported goods must exceed one million Kenya Shillings. Source: World Bank (2009a)

Assessment of a duty and tax relief regime should consider the nature of the program and how it is

administered. Specifically, it comes down to a balance between meeting the needs of exporters for

limited bureaucracy and cashflow commitments and the needs of government for minimizing the risk of

diversion. Exporters prefer mechanisms whereby duties are exempted, while governments prefer some

financial guarantees, either through exporters putting up a bond or paying and reclaiming duties. For

exporters, particularly small exporters, the burden of drawback mechanisms in some countries often

undermines its potential value as a source of competitiveness. This is because extremely detailed

paperwork requirements may make it costly or difficult for the exporter to prove their right to the

refund, and because in many countries exporters face extraordinarily long delays in receiving their

refunds. It is, therefore, critical to have the right legal and regulatory environment to manage the

schemes effectively and efficiently. Customs needs to have processes in place to ensure that claims for

duty relief are legitimate and can be audited, but it needs to be able to do this in an efficient way.

Export processing zones and special economic zones

Several specific aspects of the investment climate are usually targeted for improvement inside special

economic zones.

1. First, SEZs are designed to overcome land and infrastructure constraints that may hinder

investment in the national economy by providing investors access to long‐term leases, pre‐built

factory shells, and reliable utilities (electricity, water, telecommunications).

2. Second, SEZs normally aim to improve the overall administrative environment, particularly with

regard to the procedures required to register a business, acquire the licenses required to

operate, obtain visas and work permits, and access key services like utilities and construction.

This is often facilitated through the establishment of “single window” or “one‐stop shop”

services, whereby the SEZ authority will be a single point of contact to arrange the delivery of

these administrative services through coordination with the relevant government agencies.

3. Finally, another important component of the administrative services offered in zones is a

privileged and expedited customs administration. Such services often involve the stationing of

customs officers inside or at the gate of the free zone to offer on‐site clearance in order to

speed up import and export procedures. It is usually also combined with a range of other

advantages, including the ability to move and hold goods in bond as well as the removal of

financial requirements for bonded and duty‐free inputs.

Recent research (Farole, 2011) suggests that the following factors are important determinants of the

potential success of SEZs as a tool for promoting exports:

Infrastructure quality: The quality and cost of electricity is the most important determinant of

competitiveness for manufacturing‐related exporters (for services exporters,

telecommunications infrastructure tends to be equally important). In too many SEZs,


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infrastructure provision remains of relatively poor quality.

Transport and trade facilitation: Efficient on‐site customs clearance, effective transport links to

key trade gateways, and (perhaps most importantly) efficient port operations are critical

determinants of SEZ success.

Investor servicing (one‐stop‐shops): While these are less critical in the long‐run, access to an

effective “one‐stop” service is often important for attracting and converting initial investors.


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Trade Promotion Infrastructure: Industry Coordination and Sector support



Main components in industry coordination and sector support




Quality Market

penetration

Industry associations and bodies

Clusters Subsidies and incentives to sectors and exporters


Indicators Sources

Industry associations Share of firms / exporters that are members of industry bodies (taking into account only those that are due‐paying members)

Country‐specific

Clusters Existence of national cluster programs Country‐specific


Existence of subsidy programs Country‐specific

Share of exporters benefiting from subsidies Country‐specific

Cost of subsidies (actual and % of export value) Country‐specific

WTO actions over past x years WTI


Interview targets


Clusters and

industry bodies

Ministry of Trade and Industry or other ministry with responsibility for clusters, sectors, and industrial policy

Any relevant local or regional government

National Competitiveness Council (if established)


Established cluster and industry representative bodies

Universities and training institutions Relevant research institutions


Ministry of Trade and Industry or other ministry with responsibility for administering incentive regimes

Export Promotion Agency


Established cluster and industry representative bodies


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Industry bodies What is the nature of interaction between industry bodies and government? Does government provide financial or other support to facilitate the creation and

sustainability of industry associations? What are constraints to more collective action on part of industry / exporters?

What role do they see for industry bodies going forward? Clusters Do they take a sectoral or cluster approach?

What sectors / clusters are officially being supported with policy? How are these chosen?

How are they organized to deliver support? What public goods are they focused on delivering?


What subsidy and incentive programs do they offer to exporters? What is the take up rate on these? What constraints are there to higher take up

(awareness, administrative burdens, etc.)? Are they monitoring the cost and impact of these programs? What are the results?


Industry bodies What is the level and nature of membership? What share of members are exporters? What are the main services they offer? What specific services for exporters? What is the nature of interaction between industry bodies and government? What are constraints to more collective action on part of industry / exporters?

Clusters How are the clusters organized? – role of private and public sector and other institutions?

How are they funded? Is it sustainable? How effective is public‐private dialogue? What public goods are being delivered through the cluster or provided by

government? To what degree does the cluster actually contribute to greater competitiveness for

individual exporters?


What subsidy and incentive programs are available? Do exporters take advantage of these? What constraints are there to higher take up

(awareness, administrative burdens, etc.)?





May have limited scale through which to support clusters in many industries – critical that sectoral support tightly matched with comparative advantage

Industry bodies likely to be dominated by small group (elite)

Resource‐rich May be strong industry bodies from natural resources sectors (potentially dominated by FDI) with effective lobbying

Role of subsidies and incentives may be important to probe – how effective is the incentive structure in facilitating investment in sectors where the country has


203

comparative advantage?


Building capacity of industry bodies and clusters should be a priority

Middle income May have well‐established, strong industry bodies

Emphasis on cluster support to facilitate innovation and upgrading

Industry representation, cluster, and sector support will vary tremendously across sector and country. In

this respect are no specific considerations inherent to the sector.

Background reading: relationship between industry coordination and sector support and

trade competitiveness

Governments provide a range of support targeted to individual sectors, which may be specifically

targeted to promote export competitiveness, or may do so implicitly. In the past, such support normally

came under the banner of “industrial policy” and targeted specific sectors due to their traditional

importance to the economy or their potential to act as a catalyst for diversification and upgrading. While

such targeted sector policy remains popular in many countries, more recently government intervention

has focused instead on a more comprehensive “cluster” approach. A cluster is an agglomeration of

companies, suppliers, service providers, and associated institutions operating in the same broad field,

and usually located within a relatively narrow geographical area (World Bank, 2009b). Cluster support

differs fundamentally from traditional industrial‐policy inspired sectoral approaches principally in their

focus on related and supporting institutions, their preoccupation with competitiveness and their

openness to imports and foreign investment.

Clusters contribute to competitiveness by offering a rich environment for realizing externalities,

including access to specialized labor, specialized suppliers, and knowledge spillovers. This allows

individual firms to realize the benefits of scale economies, contributing to greater productivity and

innovation (e.g. the ICT clusters in Silicon Valley and Bangalore). However, as clusters rely on external

scale economies, they face a challenge of collective action. Thus there is often an important role for

government in facilitating clusters, particularly where the cluster remains latent and in countries and

regions where cooperation. Governments support clusters in various ways, including facilitation of

dialogue to overcome coordination challenges, and in facilitating or in some cases providing public

goods to enable clusters to realize opportunities for scale. Because many clusters in their initial stages

are comprised of companies which may compete aggressively against each other in domestic markets,

facilitating clusters to address export market opportunities is often a valuable first step to cluster

development.

Box 2B.21: Upgrading Quality for Competitiveness in Pakistan’s Sialkot Surgical Instruments Cluster

Of Pakistan’s clusters, the one with most success in exporting has been Sialkot’s surgical instrument cluster. The city hosts around 300 producer firms, supported by over 2,000 subcontracted supplier firms. Together, the firms produce over 2000 different types of surgical instruments, most of which are exported to the United States (59%) and Europe (27%), making Pakistan the world’s second largest exporter of surgical instruments (Nadvi, 1997). The vast majority of firms in Sialkot’s Surgical Instrument cluster are composed of


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SMEs with less than 20 employees, mostly family‐run and with a defining characteristic: a vast social network between firms at all levels. The industry faced a serious crisis in the mid‐1990s when the US Food and Drug Administration revealed that Sialkot surgical instruments failed to meet quality standards (under the Good Manufacturing Practice system), and thus prohibited import of its products. The industry had no choice but to adapt. Under the effective guidance of two existing local institutions, the Surgical Instrument Manufacturers Association and Sialkot’s chamber of commerce, the cluster achieved rapid quality upgrades, resulting in the US embargo being dropped. By 1996, the industry more than recovered its market, exporting 10% more than in previous years. The cluster has been able to respond successfully to subsequent quality challenges and a number of firms in the cluster have adopted the ISO9000 quality standard. The surgical instruments sector is now Pakistan’s second in numbers of quality certified firms, with the textile sector in first place. Source: UNIDO (2006)

Finally, many governments around the world offer a range of subsidies and incentives – in many cases

linked with some of the instruments discussed above – to promote exports. Such incentives may include

direct subsidies, low‐cost loans, or tax relief. Export subsidies are most commonly applied in the

agricultural sector, where the establishment of price floors (as part of income support programs for

farmers) encourages overproduction59. But it is also common in other sectors where governments want

to encourage production for export rather than domestic markets, or where export sectors are seen as

particularly important to protect (e.g. the automotive industry in South Africa and elsewhere, the textile

and garments sector in India, etc.)

Several arguments that have been raised to support government intervention to subsidize exports, most

notably the case of “infant industries”– that learning‐by‐doing and external scale, in combination with

imperfect capital markets (information asymmetries), justifies temporary industry protection through

such schemes as export incentives and subsidies. However, many such schemes create significant

market distortions and may not be compatible with WTO agreements. Although subsidies may not

impact underlying firm competitiveness (and may in fact be harmful to competitiveness in the long run),

they do alter the terms of trade and as such are important to consider when evaluating a country’s

performance in global trade, particularly within specific sectors.

It is beyond the scope of this Diagnostic to assess the performance of individual clusters and of sectors

more broadly. The more relevant issue is to understand the nature of government policy support to

clusters and the degree to which it is playing a positive role in supporting competitiveness. Components

of support that can be assessed include:

The degree to which cluster support is targeted to industries with comparative advantage: Too

often, cluster strategies target areas beyond what is reasonable for a country to become

competitive in even in the medium term (e.g. biotech and nanotech). Good practice cluster

approaches focus on sectors where the country or region has already shown some success or

where it has a clear source of comparative advantage. 59 Export subsidies are a lower cost alternative to governments having to buy up the excess production.


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The institutional structure for delivery of sector and cluster support: Good practice would call for

participation of both national and local or regional government as well the private sector and

other institutions such as universities, training centers, etc. Within government, inter‐ministerial

coordination is critical to success.

The role of the private sector in driving the initiatives: While government has a clear role, most

successful cluster initiatives are, at least in time, strongly private sector driven with active

commitment from the leading companies, both domestic and FDI.

A wide range of incentives and subsidy regimes have been developed to support exporters. Among the

most common are:

Direct subsidization of exports: this may be on a nominal or an ad valorem basis.

Transport subsidies: this involves cost reduction or refund on transport or customs‐related costs

for exporters; it is most commonly used when transport costs rise substantially (for example, to

mitigate the impact of petroleum price increases on exporters reliant on air cargo).

R&D or training subsidies: these tend to be less directly linked with exports.

Tax incentives: tax holidays or reductions linked to export participation or export volumes

Many of these are, however, not compliant with WTO agreements, as outlined in Box 2B.22.

Box 2B.22: WTO Prohibitions Against Export Subsidies: The SCM Agreement

Article 3 of the Agreement on Subsidies and Countervailing Measures (SCM) identifies export subsidies as prohibited and provides clear examples of interventions that constitute export subsidies. The SCM agreement defines export subsidies as subsidies that are contingent in law or in fact upon export performance. Examples of prohibited export subsidies include (but are not limited to) the following:

A direct subsidy contingent on export performance;

Currency retention schemes involving a bonus on exports;

Preferential transport and freight charges for export shipments;

Provision of domestic products and services for exports at terms more favorable than those for domestic goods;

Exemption, remission or deferral of direct taxes or social welfare charges if contingent on exports;

Allowance of special direct tax deductions for exports above those granted on goods for domestic consumption;

Exemption or remission of indirect taxes on exports in excess of those on goods sold for domestic consumption;

Exemption, remission or deferral of prior stage cumulative taxes on goods or services used in the production of exported products in excess of products sold for domestic consumption (except for the exemption, remission or deferral of such taxes on "inputs consumed" in the production process);

Provision of export credit guarantees or insurance programs at premium rates inadequate to cover long‐term costs; and

Grants of export credits at rates below those which they pay for the funds, or at below market rates, or payment of all or part of the costs of obtaining credit.

Source: Creskoff and Walkenhorst (2009)


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Trade Promotion Infrastructure: Innovation



Main components in innovation




Quality Market

penetration

Product Innovation

Process Innovation


Indicator

Sector relevance

Stage of development Relevance

Measure / Description Source

A‐ Absorption and Innovation local Capacity

A1‐ Scientific / design capabilities

Patent applications, nonresidents

all most science

based and scale

intensive

all but mostly middle‐income

Worldwide patent applications filed through the Patent Cooperation Treaty procedure or with a national patent office for exclusive rights for an invention – provides protection for the invention to the owner of the patent for a limited period, generally 20 years.

World Intellectual Property Organization (WIPO), WIPO Patent Report: Statistics on Worldwide Patent Activity.

Patent applications, residents

Patents in US Number of patents filed in the US by residents of a country

U.S. Patent and Trademark Office

Patents in Europe Number of patents filed in the European Union by residents of a country

European Patent Office

Trademark applications, direct nonresident

all but mostly supplier

dominated and

specialized suppliers

all Trademark applications filed are applications to register a trademark with a national or regional Intellectual Property (IP) office. A trademark is a distinctive sign which identifies certain goods or services as those produced or provided by a specific person or enterprise. A trademark provides protection to the owner by ensuring the exclusive right to use it to identify goods or services, or to authorize another to use it in return for payment.

World Intellectual Property Organization (WIPO), WIPO Patent Report: Statistics on Worldwide Patent Activity.

Trademark applications, direct resident


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Royalty and license fees, receipts (BoP, current US$)

all mostly science

based also nature based

all but mostly middle‐income

Royalty and license fees are payments and receipts between residents and nonresidents for the authorized use of intangible, nonproduced, nonfinancial assets and proprietary rights (such as patents, copyrights, trademarks, industrial processes, and franchises) and for the use, through licensing agreements, of produced originals of prototypes (such as films and manuscripts). Data are in current U.S. dollars

International Monetary Fund, Balance of Payments Statistics Yearbook and data files.

Licenses % of establishments in the country/sector that have purchased either a foreign or local license


Researchers in R&D (per million people)

all mostly science based

Researchers in R&D are professionals engaged in the conception or creation of new knowledge, products, processes, methods, or systems and in the management of the projects concerned. Postgraduate PhD students engaged in R&D are included.

World Development Indicators

Research and development expenditure (% of GDP)

Expenditures for research and development are current and capital expenditures (both public and private) on creative work undertaken systematically to increase knowledge, including knowledge of humanity, culture, and society, and the use of knowledge for new applications. R&D covers basic research, applied research, and experimental development.

Scientific and technical journal articles

Scientific and technical journal articles refer to the number of scientific and engineering articles published in the following fields: physics, biology, chemistry, mathematics, clinical medicine, biomedical research, engineering and technology, and earth and space sciences

National Science Foundation, Science and Engineering Indicators

Quality of scientific research institutions

all all but mostly middle‐income

“To what extent do you agree that your country has adequate scientific research institutions available? 1: Disagree strongly, 5: Agree strongly

World Economic Forum, GCI

A2‐ IPR / Certification

Intellectual property protection

all all How would you rate intellectual property protection, including anti‐counterfeiting measures, in your country? 1 = Very weak, 7 = Very strong



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International Certifications (ISO)

all but mostly

exporters

% of establishments in the country/sector that have an International Organization for Standardization certification


A3‐ Human Capital

Technicians in R&D (per million people)

all all but mostly middle‐income

Technicians in R&D and equivalent staff are people whose main tasks require technical knowledge and experience in engineering, physical and life sciences (technicians), or social sciences and humanities (equivalent staff). They participate in R&D by performing scientific and technical tasks involving the application of concepts and operational methods, normally under the supervision of researchers.


Availability of scientists and engineers

all mostly science based

To what extent do you agree that scientists and engineers in your country are widely available? 1: Disagree strongly, 5: Agree strongly


Enrollment in STEM disciplines

all Registered students in Science, Technology, Engineering or Mathematics

Country's own statistics

School enrollment, tertiary (% gross)

Gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. Tertiary education, whether or not to an advanced research qualification, normally requires, as a minimum condition of admission, the successful completion of education at the secondary level

United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics

Share of population speaking English

all but less supplier

dominated

Economic Growth Center at Yale University

% of tertiary‐educated individuals in OECD countries,

Docquier and Marfouk 2004

A4‐Production Capabilities

State of cluster development

all mostly supplier

dominated and

specialized suppliers

all, mostly low income

“In your country, how extensive is collaboration among firms, suppliers, partners, and associated institutions within clusters? 1 = Collaboration is non‐existent, 7 = Collaboration is extensive


Local availability of specialized research and training

all all In your country, to what extent are high quality specialized training services available? 1= not available, 7= widely available


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services

University ‐industry collaboration

To what extent do business and universities collaborate on research and development (R&D) in your country? 1 = Do not collaborate at all, 7 = Collaborate extensively

Production process sophistication

In your country, how sophisticated are production processes? 1 = Not at all – labor‐intensive methods or previous generations of process technology prevail, 7 = Highly – the world’s best and most efficient process technology prevails

A5‐ Finance

Domestic credit provided by banking sector (% of GDP)

all all Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net.


Access to Finance all all Is access to financing, which includes availability and cost [interest rates, fees and collateral requirements] – measures share of firms which identify it as a major obstacle to doing business.


B‐ Exposure to external technology

FDI net inflows all all % of GDP World Development Indicators

FDI in manufacturing

all all % of total FDI Country's own investment statistics

Inward FDI potential index

all all 0‐1 UNCTAD

FDI and technology transfer

all all “To what extent does foreign direct investment (FDI) bring new technology into your country?1 = Not at all, 7 = FDI is a key source of new technology


Royalty and license fees, payments

all all but mostly middle income

(BoP, current US$) International Monetary Fund, Balance of Payments Statistics Yearbook and data files.

Imports of high‐tech goods

all all % of GDP CEPII BACI database

Imports of high tech capital goods

all all % of GDP


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Imports of intermediary goods

all all % of GDP

Foreign intermediate inputs

all all % all inputs that are foreign by country/sector


C‐Penetration of older technologies

Electrical power consumption

all all kilowatt‐hours/capita World Development Indicators

International outgoing telephone traffic

all all minutes

Air transport, registered carrier departures worldwide

all all

Agricultural machinery: tractors

all all per 100 hectares of arable land

Main lines all all per 100 inhabitants

D‐ Penetration of recent technologies

Internet users all all per 1,000 inhabitants World Development Indicators

Personal computers all all per 1,000 inhabitants

Cellular subscribers all all per 100 inhabitants

Percentage of digital mainlines

all all per 100 inhabitants


Interview targets for field research on innovation

Innovation Issue Government Agencies and Ministries Private sector and other institutions

A.1/ A3 – Skills (scientific, design capabilities / Human Capital)

Education Ministry

Science and Technology Ministry

Universities

Training Institutions

NGOs

A.2‐ IPR / Certification Standards and Norms Agency

Patent and Trademark Agency

NGOs or donor funded agencies that promote certification and standards adoption

A4‐ Production Capabilities Ministry of Industry Chambers of commerce

Business /cluster associations

Incubator associations

A5 – Finance Science and Technology Ministry

Ministry of Finance / Economy

Banks

Microfinance Institutions

Venture Capital Associations


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B‐Exposure to External Technology

Ministry of Industry

Investment Promotion Agencies

Universities’ tech transfer offices

Key Issues for discussion in interviews with government agencies and ministries

Education Ministry

Promotion of STEM careers?

Funding of PhD studies in local and foreign universities

Percentage of return of foreign trained PhDs

Science and Technology Ministry

What is the amount of government funds to R&D?

Which type of R&D (basic applied) is funded?

What are the mechanisms to fund R&D? through public R&D labs, higher education institutions, or the private sector?

Who keeps the IP of inventions discovered with government funded R&D?

Standards and Norms Agency Type of certification more demanded by firms

Sectors with highest demand

Are standards usually adopted by large firms? By SMEs?

Patent and Trademark Agency Extend of use of IPR in its different modalities: local patents, utility models and industrial designs.

Does the local IPR agency also to provide guidance in international patenting (e.g. US and Europe)?

Ministry of Industry Is there a strategy / policy for innovation? what are the main components?

Is there a special tax treatment for R&D investments?

What are the policies related to cluster development?

Ministry of Finance / Economy

Is there a special tax treatment for R&D investments?

What is the amount devoted for government funded R&D?

Investment Promotion Agencies FDI legal regime, do foreign investors have the same legal rights as local investors?

What are the incentives that MNCs receive for installing plants in the host country? for technology licensing?

Do the incentives differ by sector?

Key Issues for discussion in interviews with private sector and other institutions

Universities Are there tech transfer offices in the university?

What about spin off companies initiated by professors?

Structure of the R&D funding: own funds, government funded R&D, private sector funded R&D

Joint applications with firms to government funded R&D

Training Institutions Are there tech transfer offices in the university?

What about spin off companies initiated by professors?

Structure of the R&D funding: own funds, government funded R&D, private sector funded R&D

Joint applications with firms to government funded R&D

NGOs and donor‐funded agencies What programs exist to promote standards adoption?

What are the main shortcomings in the current standards and


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certification regime?

Chambers of Commerce What is the role of public and private sectors on the organization and structure of production clusters?

Issues with access to government funding and programs

Linkages between local firms and FDI

Schemes to link firms with universities

Business associations Use of government funded R&D

Use of financial institutions funding for R&D

Schemes to link producer with input suppliers

Banks Funds for R&D – basic

Funds for R&D – applied

Funding for early stage research

Is any sector (s) prioritized?

Microfinance Institutions Funds for R&D – basic




Venture Capital Associations Funds for R&D – basic




Analytical approach

The analytical framework distinguishes between the factors that dictate the efficiency with which an

economy absorbs and creates technology on the one hand and the extent to which it is exposed to

external technologies on the other hand. First, the speed with which a country absorbs and adopts

technology depends on many factors, including the extent to which a country has a technologically

literate workforce and a highly skilled elite; promotes production capabilities that encourages

investment and the creation and expansion of firms using higher‐technology processes; permits access

to capital; and has adequate public sector institutions to promote the diffusion of critical technologies

where private demand or market forces are inadequate. Second, among the most important channels

through which low and middle‐income countries are exposed to foreign technologies are trade; foreign

direct investment (FDI); and contacts with highly skilled diaspora members (nationals working abroad)

and with other information networks, including those of academia and the media.

The framework considers four key dimensions: A‐ Absorption and Innovation local Capacity, B‐

Exposure to external technology, C‐Penetration of older technologies, D‐ Penetration of recent

technologies. The assessment will collect its data from two different components: a quantitative part

that uses secondary sources to capture innovation metrics and a qualitative section to be formulated to

key actors in the innovation ecosystem, both in the public and private sphere as well as the nonprofit.

Previous sections have stressed the particularities of different innovation patterns. Table 2B.9 provides a


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summary of the degree of influence of each innovation dimension on trade competitiveness, taking into

account the importance of innovation dimensions for each innovation pattern, in terms of: i.) whether

these measures are likely to have an impact on export diversity and/or export sophistication:

specifically, in terms of new products for the former and quality upgrading for the latter; ii) how they

impact the cost competitiveness of exporters. For example, if traditional manufacturing is important in

an economy and therefore supplier dominated is the prevalent innovation pattern, design capabilities

and certification compliance are likely to be vital for both introducing new products and upgrading

existing products. As explained, the nature of innovation in supplier dominated sectors is not based on

developing new technologies but on improving designs and branding. This innovation pattern relies on

technology embodied in foreign capital goods; therefore exposure to external technology is paramount.

A big opportunity to innovate resides in improving production processes using embodied new

technology and human capital expressed in technicians and engineers. The funding needed in traditional

industries to enter the market is usually low compared to higher entry barriers in all other sectors.

Table 2B.9: Framework for analysis of innovation characteristics and trade competitiveness

DiversificationNew product

Sophistication –product upgrading

Cost saving – new processes

A‐ Absorption and Innovation local Capacity

A1‐ Scientific / design capabilities SD *** design SI *** both SS *** both SB ***scientific

SD *** design SI *** both SS *** both SB ***scientific

Not determinant

A2‐ IPR / Certification SD ** certificationSI * **IPR SS *** IPR SB ***IPR

SD * certificationSI *IP SS * IPR SB *IPR

Not relevant might even increase costs

A3‐ Human Capital SD *SI ** SS ** SB ***

SD *SI ** SS ** SB ***

SD ** SI ** SS ** SB **

A4‐Production Capabilities All *** All *** All***

A5‐ Finance SD * SI ** SS *** SB **

SD * SI ** SS *** SB **

SD * SI * SS * SB *

B‐ Exposure to external technology All *** All *** All ***

C‐Penetration of older technologies All *** All *** All ***

D‐ Penetration of recent technologies

SD **SI *** SS *** SB ***

SD **SI *** SS *** SB ***

SD * SI ** SS ** SB **

SD‐ Supplier dominated SI‐Scale Intensive SS‐Specialized suppliers SB‐Science Based *important, **more important, ***very important


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May have limited scale and market access to support leading‐edge innovation

However, obtaining knowledge through suppliers may also be restricted due to difficulties in access

Certification and standards‐related issues may be important barriers

Resource‐rich May have strong technical skills linked to the resource sector that could be applied to support upgrading and diversification

Important to understand whether linkages with local firms (or lack of them) are supporting (restricting) knowledge spillovers


Focus on technology absorption and generating spillovers from FDI

Certification and standards‐related issues may be important barriers

Technology transfer policies and institutions may be critical to assess

Middle income Main challenges will be in developing scientific and design capabilities

Access to recent technologies likely to be a critical issue

IPR and patenting issues likely to be important to attracting science‐based activity

Skills development, particularly tertiary education critical

Assess role of industry‐university linkages and government research institutions

To better understand a country’s innovative capabilities it is necessary to map the country’s economic

and export structures to understand specific sectoral patterns. Using Table 2B.10 we can classify specific

industries according to the innovation patterns and export propensity. Table 2B.10 provides a guideline

to match innovation patterns with ISIC classification (ISIC) and the OECD classification of industries using

sectoral technological content.

Table 2B.10 Comparative Industrial Classification

ISIC

Rev.31

Innovation patterns OECD tech intensity R&D/production

Aggregate Median

High‐technology industries

Aircraft and spacecraft 353

Science based/ scale intensive 10.3 10.4

Pharmaceuticals 2423 Science based 10.5 10.1

Office, accounting and computing 30


Radio, TV and communications equipment 32


Medical, precision and optical instruments 33 Specialized suppliers 9.7 5.6

Medium‐high‐technology industries

Electrical machinery and apparatus, n.e.s. 31 Scale intensive 3.6 2.3


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Source: Author’s elaboration using OECD (2003), Pavitt (1984), UN‐ISIC

Table 2B.11: Sectoral groups according to degrees of tradability and differentiation60

Sectors Tradability61 Product differentiation

1‐ Infrastructure services Low Low

2‐ Local services Low Medium

3‐ Business services Low /medium High

4‐ R&D‐intensive manufacturing High High

5‐ Manufacturing High Low

6‐ Resource intensive industries Medium Medium

Source: Author’s adaptation from McKinsey 2010

60 1‐ R&D‐intensive manufacturing: Pharmaceuticals, Radio, TV, communication equipment, chemicals,

aircraft and spacecraft, medical instruments. (Comment: Mostly SB, SI, SS) 2‐ Manufacturing: motor vehicles, machinery and equipment. (Comment: Mostly SI, SS) 3‐ Resource intensive industries: pulp, paper, printing, publishing, wood products, rubber and plastics, basic

metals, fabricated metals, agriculture, forestry and fishing. (Comment: Mostly SI, SD) 4‐ Infrastructure services: electricity, construction, hotels and restaurants, land transport. 5‐ Local services: real state, post, telecommunications, wholesale and retail, finance and insurance 6‐ Business services: R&D, computers and related activities

61 (M+X)/sector GDP

Motor vehicles, trailers and semi‐trailers 34 Scale intensive 3.5 2.8

Chemicals excluding pharmaceuticals 24 excl. 2423

Science based

2.9 2.2

Railroad equipment and transport equipment, n.e.s.

352 + 359

Scale intensive

3.1 2.8

Machinery and equipment, n.e.s. 29 Specialized suppliers 2.2 2.1

Medium‐low‐technology industries

Building and repairing of ships and boats 351 Specialized suppliers 1 1

Rubber and plastics products 25 Scale intensive 1 1.1

Coke, refined petroleum products and nuclear fuel 23

Scale intensive

0.4 0.3

Other non‐metallic mineral products 26 Scale intensive 0.8 0.6

Basic metals and fabricated metal products 27‐28 Scale intensive 0.6 0.5

Low‐technology industries

Manufacturing, n.e.s.; Recycling 36‐37 N/A 0.5 0.5

Wood, pulp, paper, paper products, printing and publishing 20‐22

Supplier dominated

0.4 0.1

Food products, beverages and tobacco 15‐16 Scale intensive 0.3 0.3

Textiles, textile products, leather and footwear 17‐19

Supplier dominated

0.3 0.4

Total manufacturing 15‐37 2.6 2.2


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The reclassification exercise provides a tool for identifying main innovation patterns in a country’s

economy. Nevertheless not all manufacturing nor services sector show the same degree of tradability in

external markets nor the same potential for product differentiation (a proxy of production and export

diversification). We can link then the economic sector structure with its tradability and its potential

diversification using Table 2B.11. Manufacturing products are the most tradable, especially in the

categories: R&D intensive manufacturing and manufacturing (See footnote to Table 2B.11 for detailed

industry list). Services are not highly tradable. Product differentiation varies within services sub sectors

as well as in manufacturing sub sectors.

Background reading: relationship between innovation and trade competitiveness

Diversification and sophistication are important dimensions of trade performance. Recent research

suggests that the developing countries which have been more successful in terms of growth of both

exports and output have tended to increase the diversity and sophistication of the products they

produce and export (UNIDO, 2009). Diversification tends to be more important for countries climbing

the stages of development. Imbs and Wacziarg (2003) find an inverse U‐shaped relationship between

specialization in production and exports and per capita income. As incomes rise, countries become more

diversified, in terms of their production and export structures. New product lines are introduced and

new activities are taken up within existing sectors, until countries reach high levels of income. They also

find that poor countries and—to a lesser degree—rich countries tend to specialize in the production of a

fairly narrow range of activities. Across a wide range of incomes however, the diversity of what a

country produces increases with the level of per capita income.

In most cases, when diversification and sophistication are coupled, they are an outcome of “moving up

the production ladder” from relatively simple mass manufacturing activities, such as textiles or

footwear, to increasingly more complex production processes, such as metal‐mechanical, chemical or

electronics industries. Indeed, while successful low‐income countries tend to expand their export

market share unskilled labor intensive products, success for middle income countries typically involves

moving vigorously up the ladder of product sophistication. Diversification is fostered through a strong

network of linkages generated across economic sectors. Linkages to other sectors of the economy are

related with trade because industrial diversification appears to lead to export diversification. More

diverse economies may be better able to take advantage of export opportunities in global markets.

Finland’s wood industry and its movement up the production ladder provide an example of industrial

and export diversification and sophistication through linkages with other sectors (see Box 2B.23).

As a major driver of economic growth and productivity, innovation62 has obvious impact on exports and

62 Innovation is defined as new ways to solve problems by combining technology (an improvement in product, process, marketing, or organization) with transformational entrepreneurship (typically involving commercialization of technologies via formal firms but also including value generation by informal, not‐for‐profit, and governmental entities). Innovation ranges from incremental new‐to‐the‐firm adoption and adaptation of existing technologies to radical new‐to‐the‐world creation and commercialization of disruptive products and processes.


217

trade competitiveness. First, innovation in the form of new products increases diversification while

sophistication is fostered by quality upgrading. Recent research in the manufacturing sector has found

an influence from product innovation to productivity and then to exporting which may explain how a

firm’s decision to invest in R&D and make product innovations drives its productivity and triggers the

decision to start exporting (Cassiman and Martinez, 2007). As well, participation in global production

through exports provides firms with access to knowledge to meet requirements of product quality,

delivery time, process efficiency, and environmental, labor, and social standards. Mastering the

requirements of global production (“learning by exporting”) helps build a platform for local innovations

in more sophisticated products (Gereffi, Humphrey, & Sturgeon, 2005).

And second, exporting may imply the reduction of inefficiencies through the renewal of production

processes with resulting cost savings. Process innovations may have labor, capital and inputs saving

effects and are therefore expected to result in significant productivity growth (Hall, et al 2007; Harrison

et al 2005). Through persistently performing an activity over time, a firm may accumulate skills and

knowledge as well as learn how to organize and manage the activity in an effective manner (Andersson

and Loof, 2009). For example, Damijan et al (2008) support this idea by showing the link between

exporting to process innovation, and subsequently to productivity growth in a panel data from Slovenian

firms between 1996 and 2002.

Box 2B.23: Moving up the production ladder in Finland – sector linkages, diversification, sophistication and exports

Finland’s exports 1900‐1996

Source: Hernesniemi, H., et al., 1996. Advantage Finland: the future of Finnish industries. In: Rouvinen, P. (Ed.), ETLA—The Research Institute of the Finnish Economy. SITRA— The Finnish National Fund for Research and Development. Taloustieto Oy, Helsinki.

Finland is an example where linkages to domestic suppliers sprout diversification and sophistication from the wood and paper industry. During the first development phase (approximately to the mid 1950s), native wood was only minimally processed before being exported and the majority of required capital goods and production inputs were imported. During a second phase, which lasted until 1970, industries that processed wood into cellulose, paper and cardboard were established. All the engineering services required in the value chains were provided by local companies and the first local technology intensive suppliers came into being


218

and developed rapidly. The development after 1970 is characterized by increasing exports of high‐valued wood, paper, and chemical products as well as machinery and equipments (Hernesniemi et al.). In 2005, instruments, electro machinery, processing machinery and transport equipment were already in themselves important export products of the Finish economy representing 21% of all exports.

Source: Torres‐Fuchslocher (2010).

Main components of innovation analysis – understanding patterns of innovation

There are a number of sources by which firms acquire knowledge and innovate. Certain innovation

patterns are more relevant for certain economic structures and their importance vary by country. Within

each pattern firms tend to have a predominant learning and innovation behavior, in terms of main

sources of technical change, dependence on basic or applied research, modes of R&D (in‐house or

extramural R&D), use of tacitness or codified nature of knowledge, scale and relevance of R&D activity,

and degree of appropriability of the innovations.

Table 2B.12 provides the taxonomy of the different innovation patterns, the economic sectors that

comprise each pattern, their main components of innovation and typical firm size. It is influenced

heavily by Pavitt's (1994) work on sectoral innovation patterns in manufacturing as well as by recent

developments (Giuliani, et al. , 2005) and the inclusion of the services sectors (Castellaci et al., 2008).

Table 2B.12 – Sector innovation patterns and the main components of learning and innovation

Broad sector Industries Typical Firm Size

Learning Innovation Components and Characteristics

Traditional manufacturing

Textiles and apparel, footwear, furniture, tiles

SME Mainly supplier driven

Most new techniques originate from machinery and chemical industries

Opportunity for technological accumulation is focused on improvements and modifications in production methods and associated inputs, and on product design

Most technology is transferred internationally, embodied in capital goods

Low appropriability, low entry barriers

Innovation takes the form of new designs and branding. Trademarks would be the ideal way to appropriate innovation efforts

Natural resource‐based

Sugar, tobacco, wine, fruit, milk, mining industry

Large Supplier driven, science based

Importance of basic and applied research led by public research institutes due to low appropriability of knowledge

Innovation is also spurred by suppliers (machinery, seeds, chemicals, etc.)

Increasing importance of international sanitary and quality standards, and of patents

Low appropriability of knowledge, but high for input suppliers


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Complex products

Automobile and auto components, aircraft, consumer electronics. Pharmaceuticals

Large Scale intensive and also science‐based firms

Technological accumulation is generated by the design, building and operation of complex production systems or products

In‐house R&D is critical for innovation

Process and Product technologies develop incrementally

In consumer electronics, technological accumulation emerges mainly from corporate R&D laboratories and university. There is a skill entry barrier

Appropriability is medium, high

Specialized suppliers

Software, precision equipment

SME Specialized suppliers

Important user‐producer interactions. Learning from advanced users

Low barriers to entry and low appropriability

High in‐house R&D for development of cutting edge technologies

Source: Author’s elaboration based on Pavitt (1984) and Giulani et al. (2005)

Traditional manufacturing includes labor intensive and ‘‘mature’’ technology industries, such as textiles,

footwear, tiles, and furniture. This group of industries tends to have stable, well‐diffused technologies.

SMEs dominate the traditional manufacturing sectors. These sectors are defined as supplier dominated

because producers of inputs (machinery, materials and the like) introduce major process innovations

(Pavitt, 1984). The technologies are primarily embodied in the capital equipment; the low end of the

range has relatively simple skill requirements. Many traded products are undifferentiated and compete

on price: thus, labor costs tend to be a major element of cost in competitiveness. Scale economies and

barriers to entry are generally low. The final market grows slowly, with income elasticities below unity.

However, there are exceptions to these features. There are particular low technology products in high

quality segments where brand names, skills, design and technological sophistication carry large value

added, even if technology intensity does not reach the levels of other innovation patterns (Lall, 2000)

Firms in traditional manufacturing can upgrade their products (and processes) by developing or

imitating new products’ designs, and by interacting with large buyers who are increasingly playing a role

in shaping the design of final products and the production process (time, quality standards, and costs).

The production of traditional manufactures has undergone massive relocation from rich to poor

countries, with assembly operations shifting to low wage sites and complex design and manufacturing

functions retained in advanced countries. This relocation has been the engine of export growth in this

industry, though the precise location of export sites in textiles and clothing has been influenced strongly

by trade quotas and trade agreements (Gereffi et al, 2005). Other exports that have benefited from

active relocation in this group are toys, sports and travel goods and footwear (Lall, 2000).

The natural resource‐based sectors activities imply the direct exploitation of natural resources, for

example, copper, marble, or fresh fruit. The output of extractive industries is the ultimate internationally

standardized product. For example, copper produced by a mine in Latin America is likely to be identical

to copper produced in Zambia. An implication is that downstream integration from commodity


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extraction is often likely to fail, because buyers can choose any producer of such standardized goods.

Yet to date such downstream activities have often been the main focus of government attempts to

broaden the economy from its extractive industries base (UNIDO, 2009). Traditional manufacturing and

natural resource‐based sectors are, by far, the most common in developing countries.

The complex products group includes automobiles, auto components, aircraft, information and

communications technology, and consumer electronics among others. These industries are dominated

by large firms which take advantage of the economies of scale intrinsic to the technologies of the sector.

Complex products industries can be separated further using Pavitt’s categories of science based

industries and Scale Intensive sectors.

First, science based industries have an innovation pattern that is the closest to the traditional “linear

model of innovation,” where in‐house R&D is critical for innovation. Science based innovation has 5

stages: fundamental research, applied research, engineering development, production engineering and

service engineering (Balconi, et al 2010). Innovations are appropriated by the inventor and take the form

of a large number of patents. Their products have advanced and fast‐changing technologies. The most

advanced technologies require sophisticated technology infrastructures, high levels of specialized

technical skills and close interactions between firms, and between firms and universities or research

institutions. However, some products like electronics have labor‐intensive final assembly, and their high

value‐to‐weight ratios make it economical to place this stage in low wage areas. These products lead in

new international integrated production systems where different processes are separated and located

by MNCs according to fine differences in production costs.

Second, scale intensive industries are the heartland of industrial activity in mature economies. They tend

to have complex technologies, with moderately high levels of R&D, advanced skill needs and lengthy

learning periods. Those in the engineering and automotive sub‐groups are very linkage‐intensive, and

need considerable interaction between firms to reach ‘best practice’ technical efficiency. Automotive

products have been of particular export interest to newly industrializing countries, particularly in East

Asia (e.g. China and Korea) and Latin America (e.g. Argentina, Brazil Mexico) (Lall, 2000).

Box 2B.24: Linear Model of Innovation

The Linear Model of Innovation is identified with V. Bush who claimed that scientific progress is essential to technological innovation and economic development. This thesis was laid out in a policy paper meant to raise support for public funding of basic research (Bush, 1945). Basic research is performed without thought of practical ends. It results in general knowledge and an understanding of nature and its laws. The scientist doing basic research may not be at all interested in the practical applications of his work, yet the further progress of industrial development would eventually stagnate if basic scientific research were long neglected. In general, science does remain an important condition and component of technological progress, and one that is fundamental in science‐based industries (e.g. consumer electronics, pharmaceuticals, aircraft and spacecraft, etc. See Tables 3, 4 and Annex for list of science based sectors). The linear model of innovation conceptualized the steps involved in transforming a new concept to a practical reality in the form of a new product. The sequence is as follows:


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Basic research → Applied Research → Development → Production Applied research is nurtured by the results of fundamental (basic) research, and its emphasis is on new products and processes. Development comprises the improvement, testing and evaluation of a process, material or device resulting from applied research. In the linear model of innovation, in order to sustain basic scientific research it is necessary to train a large pool of scientists and to strengthen the centers of basic research, which are colleges, universities and research institutes. Nevertheless, there is a clear division of labor along the sequence among different types of agents who specialize in the various relevant stages. Typically, basic research is conducted in universities and public laboratories, while applied research and technological development are carried out by firms, especially large ones, which can afford expensive R&D investments

Source: Balconi et al (2010)

The specialized suppliers group is composed of makers of machinery, equipment, and precision

instruments. In this group, innovation benefits greatly from user‐producer interactions. A machinery

precision instruments industry that serves traditional manufacturing was crucial for the development of

Finland, Germany and Sweden. Empirical studies show that the strength of local technology‐intensive

suppliers and the specialized knowledge intensive services represents a common characteristic of the

development path of these countries (Torres, 2010).

Specialized suppliers have an important role in the enhancement of national technological capabilities,

since some types of knowledge creation depend on a close relationship between suppliers and

customers and the implicit exchange of information. Internationally successful export industries

including natural resources based sectors can also help local suppliers to internationalize. Clustered

industries attract the attention of foreign demand more effectively than an isolated firm. Consequently

specialized suppliers have more chances to follow the industry in the process of internationalization. In

Denmark, for example, the export‐oriented dairy and fishing sectors have stimulated dozens of

supporting industries in areas such as food processing machinery, fishing boats, varnish for boats, and

telcommunications equipment. A number of these industries are internationally competitive.

Location is important in cases such as small‐scale specialized supplier firms. This gives them an

advantage communicating with each other and with the customers and hence they can quickly respond

to the requirements of the industry. In other cases, such as the case of standardized traditional

manufactured products, the distance to other potential markets and the availability of raw materials

and inputs may have a larger weight in the location decision.

PART 2: IMPLEMENTATION TOOLKIT POLICY OPTIONS AND CASE STUDIES

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Part 2C: Policy Options for Competitiveness and Case Studies

This section of the Toolkit provides a discussion of broad policy areas and options for consideration in addressing the specific constraints identified through the Diagnostic exercise. It also includes case studies of “good practice” showing policies that were effective in addressing specific trade competitiveness constraints across a wide range of countries. However, given the highly context‐specific and endogenous nature of policy development (particularly in area of competitiveness), and the critical need to take into account political economy considerations when crafting policy, it does not provide prescriptive advice on the specific policies that should be adopted.


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Market Access Market access issues often appear to be beyond a country’s policy purview and control. This need not be

so. After the diagnostics is conducted, and if market access comes across as one of the serious hurdles to

export competitiveness, it will be clear whether the problem is on the trade policy of other countries or the

domestic capacity constraints at home. For either streams of problems, there exist recourses at least over

the medium‐term:

1. Develop and implement a trade negotiations strategy

Countries need to pursue tariff reductions at the WTO in both agriculture and non‐agriculture (NAMA)

negotiations. The reduction in MFN tariffs is particularly important for exporters that are hurt by

preferential tariffs enjoyed by competitors that export similar products. On the other hand, least developed

countries that stand to lose their margins of tariff preference because of fall in MFN tariffs will need to

negotiate to benefit from aid‐for‐trade measures and interim trade‐related assistance for export

diversification. Until the time tariffs are eliminated, they should also pursue duty‐free‐quota‐free access for

all their exports. In cases where existing GSP schemes exclude exports of interest to them, such as textiles

and clothing, countries should lobby for their inclusion in the major markets. Because progress on multi‐

lateral trade negotiations is slow, countries could pursue bilateral and regional trade strategies for

preferential access in major markets. There is also scope to reduce tariffs among developing countries, such

as the G‐77 and China, under the auspices of Generalized System of Trade Preferences (GSTP).

2. Monitor and seek disciplines against trade remedy measures, and simplify rules of origin.

With the reduction in tariffs and elimination of quotas, countries often take recourse to trade remedy

measures such as anti‐dumping and anti‐subsidy petitions to stem the flow of imports. Such trends should

be monitored and fought vigorously. These measures could be taken up in negotiations on WTO Rules to

minimize the impact of trade remedy measures with protectionist intent. Least developed countries could

also push for a moratorium of such actions against their exports. Emphasis must be put to issues like

harmonizing the rules of origin so that beneficiaries are not burdened with different criteria in different

preferential schemes. Poor countries make greater utilization of preferences when rules on cumulation and

value‐addition requirements are relaxed. In BTAs/RTAs, lax regional cumulation requirements could

encourage countries to form stronger supply chain within their regions.

3. Enhance domestic capacity to monitor and upgrade quality and standards of exports

The under‐utilization of trade preferences and existing market access opportunities indicates that much of

export competitiveness is blunted by poor domestic capacity. Foreign markets have legitimate concerns

about the safety and sanitary and phytosanitary (SPS) status of goods entering their borders. To avoid

rejections, exporting countries need to meet the required minimum of such standards in a cost‐effective

manner. Countries need effective legal and regulatory framework to comply with SPS standards set by

international agencies like the FAO and WHO. While the WTO permits countries to set their own SPS

standards, they must instill confidence in importing countries by focusing, among others, on bio‐security,

storage and disinfection of pests and diseases. Especially for agricultural exports, this requires public‐


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private partnerships to establish mechanisms for information sharing and support to organized exporting

groups including the establishment of laboratories and microbiology testing facilities for residues of drugs

and pesticides.

Box 2C.1 gives an example of the role of bilateral trade agreements in facilitating market access for

exporters.

Box 2C.1: Securing Market Access through a South‐South Bilateral Trade Agreement

Frustrated with the slow progress in securing market access through the regional South Asian Free Trade Agreement (SAFTA), Sri Lanka and India signed a bilateral trade agreement which became operational in March 2000. India committed to give duty‐free access, within three years, to all Sri Lankan exports, except tea, textiles and other items listed in the negative list. Given India’s much larger size, it agreed to include in its negative list only 419 tariff lines at the HS 6‐digit level. Sri Lanka maintained a larger negative list of 1180 tariff lines primarily to shield its agricultural sector from Indian competition. The bilateral trade agreement spurred trade flows between the countries in the early years. Indian exports to Sri Lanka increased from US$539 million in 1998 to over US$1 billion in 2003. Share of Sri Lankan imports from India reached 25 percent in 2008 from about 8.2 percent in 2000. Sri Lankan exports to India also picked up from about 1 percent in 2000 to a peak of 9.1 percent in 2005. It has since declined to under 5 percent in 2009. While India’s exports were diversified, Sri Lanka’s were concentrated in a few commodities such as copper and vegetable oil, which also attracted Indian investors to route third‐country imports via Sri Lanka to take advantage of the tariff preference. Generally considered a successful bilateral trade agreement, experiences with implementing the India‐Sri Lanka Bilateral Trade Agreement highlight specific issues that are relevant to other pairs of developing countries seeking similar trade agreements. First, the rules of origin need to be negotiated carefully, and then implemented well. Because the main export surge from Sri Lanka to India was in products where the rules of origin were not enforced, the resulting trade disputes led to the introduction of tariff‐rate‐quotas (TRQs), with India limiting preferences to imports up to a certain quantity only. This led to a decline in Sri Lankan exports during 2006‐09. Second, mutual recognition of standards is crucial to reduce non‐tariff barriers. Exporters suffer when SPS standards are not mutually recognized and shipments are subject to random harassment and lengthy approvals from the partner country. One of Sri Lanka’s major export interests, tea, was not only subject to a tariff‐rate‐quota (TRQ), but it could enter India only through two designated ports leading to low utilization of preferences. Third, the trade agreement should be comprehensive and set milestones. Both India and Sri Lanka saw their FDI inflows increase into each other’s territories. This was not only to take advantage of tariff preferences, but also a response to signals issued by the signing of a legal agreement that increased business confidence. This has led the two countries to negotiate an expansion of the current goods‐only agreement to cover trade in services and cross‐border investment under a Comprehensive Economic Partnership Agreement. This will require not only the management of domestic opposition and the political economy, but a higher threshold of regulatory preparation and changes. Source: Weerakoon (2010) and Jayasekera (2004)


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Trade and Investment Policy

In an increasing integrated world, an open trade policy can contribute to improve countries’ export

competitiveness mainly by reducing the cost of imports and increasing the variety of imports. Policies that

restrict access to foreign sources of intermediate goods and services can deny firms access to the goods

and services they need to compete internationally, and are more likely to produce firm closures and job

losses. Experience has shown that policies that protect domestic production from foreign competition with

the goal of protecting jobs and avoiding trade‐related structural adjustment are often counterproductive,

temporarily saving jobs in vulnerable sectors often at the expense of higher paying jobs in competitive

sectors of the economy. Delaying inevitable adjustment almost invariably translates into greater longer‐

term hardship than would be the case if policies of market openness were pursued.

While an open trade policy is an essential component of sustainable economic growth, complementary

policies are also needed in order to realize full benefits. Other policy choices that matter include adequate

institutions and rule of law, which are crucial for property rights and for lowering transaction costs, sound

regulatory framework and appropriate labor market, macroeconomic and investment policies that facilitate

the allocation of resources to increasingly productive employment, and adequate social safety net and

adjustment assistance.

Translating these identified constraints into policy actions is the next step. Policy prescriptions are complex

and almost always context dependent. It is, therefore, not realistic to outline a set of clear prescriptions

linked to each of the possible constraints that may be identified in the trade policy. It is also not the intent

of the Trade Competitiveness Diagnostic to get into the details of policy responses. We will however,

provide some broad guidelines in this section as to the types of policy levers that may be appropriate,

depending on the constraints identified.

Table 2C.1: Summary of potential policy remedies and project components

Policy areas and main issues Remedies / project components

Import barriers Cut import tariffs to reduce tariff dispersion, escalation and effective rate of protection

Reduce gap between MFN and preferential tariffs

Analyze revenue impact of tariff reductions

Make tariffs publicly available

Export duties Eliminate export duties and quantitative restrictions

If duties used for tax revenues, consider alternative fiscal revenues

Non‐tariff measures Identify NTMs implemented by all government agencies

Encourage dialogue among agencies to avoid duplicate and redundant regulations

Streamline related procedures in terms of time and cost

Improve information on NTMs for private sector

Firm survey on NTMs faced by importers and exporters

Set up a public‐private NTM Review Committee

Discuss less trade distorting alternatives

Use Regulatory Impact Assessment


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Facilitate customs procedures by connecting all government agencies to Single Window

Make NTMs publicly available

Study impact of State Trading Enterprises if any

Exchange rate Study the appropriateness of the current exchange rate regime

FDI policy Liberalize access to key input sectors and / or promote foreign participation in joint ventures

Identify restrictions like licensing requirements and other regulatory requirements that create an un‐level playing field between domestic and foreign investors

Box 2C.2 provides some case study examples of good policy practice in addressing anti‐export biases in the trade policy environment. Box 2C.2: Case examples of good policy practice – trade and investment policy

Chili and tariff policy

After being one of the most protectionist economies in the world in the 1960s, Chili embarked on a very ambitious trade policy agenda in the mid 1970s. Chile completely dismantled the system of quotas and unilaterally reduced its trade tariffs to reach a flat tariff of 6 percent in the 90s. Then Chili adopted a strategy of preferential trade agreements, forming FTAs with MERCOSUR, Mexico, Canada, the members of the Andean Pact, Central American Countries, Cuba, the EU and the US. As a consequence, the applied average tariff reaches is very low at about two percent. Chili also is a best practice in terms of deep integration. Chile is very open with regard to foreign investment there is no minimum/maximum national/foreign ownership requirement, no discrimination in establishment (national treatment applies), and no protection of national culture. At the multilateral level, Chili participates actively in the World Trade Organization and supports a world trade system governed by fair, transparent and non discriminatory rules. Source: Schiff, 2002

Mexico and streamlining of NTMs

The Mexican government has embarked on an ambitious reform agenda to streamline its NTMs as part of a broader competitiveness agenda in the aftermath of the financial crises that hit Mexico in the 80s and 90s. Then NAFTA provided a strong political anchor to a reform process by making reversion to protectionism politically impossible. The process was institutionalized through the creation of a regulatory‐improvement agency. The Economic Deregulation Unit (UDE), created as early as 1989, was placed under the Secretariat of Trade’s authority, but given, by Presidential decree, a broader authority than the Secretariat itself. It was then transformed into a formal federal agency, COFEMER, in 2000. The regulatory reform process was top‐down and driven by a small group of 15 to 20 technocrats. These were a mixture of economists and lawyers, many of them trained abroad. The number of licenses, permits and other information requirements in the commerce and transport sector, for instance, was cut from about a thousand in 1995 to fewer than 400 in 2000, and UDE reviewed over 500 regulatory proposals between 1995 and 2000. All in all, about 90% of Mexico’s regulatory framework was affected by the process. Source: IFC, 2008; Salas, 2009


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Domestic Policies and Institutions: business environment and governance

Once areas for improvements are identified and priorities are clearly defined, government authorities

would need to undertake a series of reforms to tackle the aspects of the business environment and

governance that most constrain competitiveness of exporters. Successful countries often combine high

levels of human capital in the public administration, and the use of modern technology to minimize the

regulatory burden on businesses and ensure greater transparency. Furthermore, where private markets are

functioning, competition serves as a substitute for regulation. By combining simple regulation with good

definition and protection of property rights, they achieve what many others strive to do: having

government regulators serve as enablers of competitiveness and economic growth. Aside from how much

and what they regulate, good practice countries share common elements in how they regulate. For

example, countries with the least time to register a business, such as Canada, have single registration forms

accessible over the Internet. Countries that take the least time to enforce a collateral agreement, Germany,

Thailand, and the United States, for example, allow out‐of‐court enforcement (IFC, 2006).

The design of regulation determines the efficiency of economic and social outcomes. Good practice is not

limited to rich countries or countries where comprehensive regulatory reform has taken place. Previous

country experiences have shown that not all reforms need to be done at the same time and that setting

priorities is the initial step for reform’s success. Partial reforms may lead to a virtuous cycle where the

success of one reform emboldens policymakers to pursue further reforms. Simplification is the most

common objective in regulatory reforms. Simplification involves not only a business process change but

also cultural change in how regulators view those whom they regulate, and how those who are regulated

perceive the value and effectiveness of the regulatory processes. Simplification does not mean

compromising core standards with respect to health, safety, the environment or labor. Simplification means

reducing or eliminating elements of a process in order to reduce complexity and inefficiency. It also involves

limiting the potential of any reintroduction of cumbersome or unnecessary requirements or steps.

Simplification does not absolutely require that a regulators make radical changes to its processes; rather, it

can be achieved through a more gradual and incremental approach.

Box 2C.3 provides some case study examples of good policy practice in addressing business environment reforms Box 2C.3: Case examples of good policy practice – domestic policies and institutions

Business registration reform in Serbia

For decades, starting a business in Serbia was time consuming and burdened with unnecessary bureaucratic hurdles—the rules inherited from the communist past were not business‐friendly. Some of the biggest problems: the $5,000 minimum capital requirement for starting a limited liability company, the necessary inspections before a company could start operating, and the commercial courts checking every document. Sixteen commercial courts were in charge of registering enterprises, and 131 municipalities dealt with registering entrepreneurs. The practice was so inconsistent that even judges in the same court required different documents. Countless reports identified the need to reform the system. By 2001‐2002 a decision was taken to undertake reform.


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The reform had 2 elements. The first was a radical change of the laws, and the second was making the new system work in practice by establishing a new registry. Using the Irish system as a model, the system was centralized and accessible via the Internet, leading to far greater legal certainty. Another very important change was the deadline of 5 days to register a company. If no decision is made in 5 days, the applicant is free to begin operations (“silence is consent”). For the company law, too, rather than amend the old law, a new one more suitable for a market economy was created. The new company law reduced the minimum capital requirement for limited liability companies (90% of all companies in Serbia) from $5,000 to €500 and eased requirements for establishing companies by making the rules more flexible. The effects of the reform were felt almost immediately. The time necessary for starting a business was reduced from 51 days in 2004 to 18 in 2005. The new system was a radical change, with a focus on customer service and user friendliness. And the forms for registration are being continually improved to reduce the time to complete them. After the very decentralized and inconsistent practices of the commercial courts, the new system is centralized, with internet access to all registration data. To unify practices only 1 person—the registrar—has final authority and the power to interpret the relevant laws. This increases legal certainty and uniformity across the board. During its first year, the Serbian Business Registry Agency registered almost 11,000 new companies, 70% more than in 2004, shrinking the informal sector. In 2 years, the number of registered businesses more than doubled.

Source: Doing Business – for a more detailed case study including a discussion of the implementation process, see http://www.doingbusiness.org/reforms/case‐studies/2007/starting‐a‐business‐in‐serbia

Tax reform in Egypt

With 37% of Egypt’s workforce in the informal sector, the government realized reform was the way to broaden its tax base and increase revenues. Tax rates were high, the process of making payments was cumbersome, and tax evasion was the norm. In July 2004 a new cabinet took office with a mandate to reform. One of its goals was to increase employment through investment. To do so, a high priority was placed on amending the tax law, customs law, and customs tariffs and on enacting competition and antitrust laws. Making Egyptian tax law closer to international practice would increase Egypt’s competitiveness and its attractiveness as a destination for foreign investment. The boldest reform would be to simplify tax law so that every business faces the same tax burden—with no exemptions, tax holidays, or special treatments for large or foreign businesses. Taxation administration also improved. Self‐assessment replaced administrative assessment, essential for the tax reform. There is also less room for interpretation, reducing the possibility of negotiating taxes. The results were an immediate increase in taxpayer submissions by almost 50%, an increase in corporate tax revenues from £E22 billion in fiscal year 2004 to £E39 billion in fiscal year 2005, despite the fall in corporate tax rates (from a variable rate between 32% and 40% to a flat rate of 20%), and an overall increase in tax revenue from 7% to 9% of GDP.

Source: Doing Business – for a more detailed case study including a discussion of the implementation process, see http://www.doingbusiness.org/reforms/case‐studies/2007/adding‐a‐million‐taxpayers‐in‐egypt

Competition policy in Australia

Australia’s competition‐oriented reforms happened in three waves, first though increased exposure to international markets in the early 1990s; followed by the development and implementation of the National Competition Policy (NCP) in the mid 1990s and with regular updates in the late 1990s and onwards. Comprehensive reforms coordinated across all levels of government aimed to (i) reform all legislation that


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restrict competition; (ii) implement a culture of “continuous improvement” in regulatory quality; (iii) implement competitive neutrality for all public businesses; and (iv) provide third‐party access to significant infrastructure facilities. The NCP was implemented through an incentive scheme in which the national government financially rewarded (or punished) achievements of negotiated milestones. A system of “competition payments,” defined as the state’s share of additional revenue arising from the NCP, was introduced – with payments made from federal to state governments that implemented specific reforms, while pecuniary penalties were imposed on slow reformers, in the form of reduced or delayed budget transfers from the central government. Although a majority of reform goals in competition policy were met on time in the ten‐year period, but some cases of pecuniary penalties for slow reformers exist. For instance, Western Australia’s uncompleted plans for water systems led to a 5% suspension penalty of its 2005–2006 competition payments. When reform goals were finally met in 2007, suspended payments were then disbursed. Similarly Queensland’s failure to address anticompetitive restrictions in liquor licensing. Resulted in a 5% permanent deduction penalty of the state’s 2003‐2004 competition payments. The Australian experience is considered to be one of the most successful examples in recent years. The NCP helped make Australia one of the top performing OECD economies, and has enhanced economic flexibility and adaptability to change, showing the quickest recovery from the global crisis among OECD countries. The reforms have reduced barriers to entry and exit and improved competition, estimated to have increased GDP by 2.5% (not including dynamic effects).

Source: World Bank (2011), The Russian Federation: Export Diversification through Competition and Innovation – a Policy Agenda.


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Access to Finance



General access to finance issues Improving the regulatory framework and competition in the banking system

Facilitating the development of early‐stage financing, including “business angel” networks

Improving credit information systems (e.g. credit bureaus)

Establishing or improving the operation of a credit guarantee program

Capacity building to improve bank knowledge and capability in dealing with SMEs and / or the export sector

Trade Finance Establishing a focused trade finance institution

Strengthening the capacity of existing institutions (e.g. export credit guarantee agency)

Expand access to existing services offered through government‐owned development banks by enabling them to be distributed through existing commercial banks

Providing backing for an export credit insurance product

Developing markets for factoring and forfeiting products

Box 2C.4: Case examples of good policy practice – access to finance

Securing lending in Vietnam

In Vietnam, accessing credit continues to be a binding constraint for entrepreneurs and the burgeoning sector of smaller businesses in Vietnam. Donor reports estimate 20 to 40 percent of households and small firms do not have access to formal financing channels. IFC responded to a request from the government of Vietnam to streamline the country’s secured transactions laws and registry. This effort resulted in a three‐point improvement on the relevant Doing Business indicator, putting the Vietnamese legal framework on par with the OECD average. Vietnam’s “getting credit” ranking in the Doing Business 2008 report improved from 80 to 48 among 145 countries. As a result of the law, any asset could legally be used as collateral, creditors would be better able to assess the risk profile of their lending portfolios, and all conflicting legislation was repealed. Source: IFC (2008) Access to Finance: Highlights Report 2008, Washington DC: The World Bank Group.

Developing innovative factoring services – the Chile case:

Nacional Financiera (NAFIN), a state‐owned development bank in Mexico with 32 branch offices nationwide, developed a so‐called productive chains program to link large, creditworthy buyer firms with small, risky firms unable to access formal finance. Participating in the factoring program are 190 big buyers (45 percent of the private sector) and more than 70,000 SME suppliers. Twenty domestic banks and finance companies act as the factors. Since the program’s inception in September 2001, NAFIN has extended more than US$9 billion in financing to SMEs. The program also contributed to a dramatic turnaround in NAFIN’s own finances from a deficit of US$429 million in 2000 to a surplus of US$13 million in December 2003. With the efficiency of its Internet platform, NAFIN’s market share of factoring grew from 2 percent in 2001 to 60 percent in 2004. It is able to provide the cheapest form of financing available for small suppliers in Mexico.


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The NAFIN factoring program operates an electronic platform that provides factoring services online. The Web site has a dedicated page for each big buyer, while small suppliers are grouped into chains with those big buyers with whom they have business relationships. The suppliers and NAFIN sign an agreement allowing the electronic sale and transfer of receivables. Once a supplier delivers goods and its invoice to the buyer, the buyer posts a negotiable document equal to the amount that will be factored on its NAFIN Web page. In general, this is equal to 100 percent of the value of the receivable. The supplier will then be able to access its buyer’s NAFIN Web page and see all factors that are willing to factor this particular receivable along with their quotes for interest rates. Picking the one it deems has the most favorable terms, the supplier clicks on the name of the factor, and the amount of the negotiable document less interest is transferred to the supplier’s bank account. When the invoice is due, the buyer pays the factor directly. The efficiency of the electronic platform means that small suppliers typically have money within one business day. NAFIN is spreading this model into Venezuela, and possibly into other Latin American countries as well in the near future. Two important steps taken by the Mexican government enabled NAFIN to undertake its successful factoring program. First, in May 2000, the government implemented reforms to legislation pertaining to e‐commerce that gave electronic messages the same legal validity as written documents. Passage of the Law of Conservation of Electronic Documents established requirements for conservation of the content of electronic messages regarding contracts, agreements, and accords. The Electronic Signature Law permits substituting electronic signatures for written signatures and allows the receiver of a digital document to verify the identity of the sender. Modifications to the Federation Fiscal Code included amendments necessary to complete electronic transactions, including factoring. Second, favorable taxation treatment helps keep factoring costs low for SMEs and gives them incentives to participate in the factoring program. All interest charges that small suppliers pay to their factors are tax deductible. Source: World Bank (2006) Expanding Access to Finance: Good Practices and Policies for Micro, Small, and Medium Enterprises

Ghana’s farmers using warehouse receipts to finance exports

Since 1989, the NGO TechnoServe has worked closely with the Department of Co‐operatives and the Agricultural Development Bank in Ghana in encouraging small‐scale farmers to form cooperatives and use warehouse receipts to store their crops for sale in the lean season. ADB provides loans against the members’ grain, at 75‐80% of current market price, and the grain is stored in cooperatively owned warehouses. The scheme is concentrated in the Brong‐Ahafo “maize triangle” of Ghana –the major area of agricultural surplus, where annual price fluctuations are high. From 1992 to 1996, farmers participating in the scheme in this region were able to increase their profits on grain sales by an average of 94% per year. Source: UNESCAP (2003)

Credit guarantee for indirect exporters – the Philippines asparagus case:

An association of small farmers in South Cotabato, Philippines with landholdings ranging from three to five hectares wanted to enter into a contract to grow asparagus for Dole Philippines Inc. The farmers were beneficiaries of the government’s Agrarian Reform Program that distributed rice and corn farm lands. Dole identified the area as suitable for planting asparagus, and offered the farmers a contract growing scheme whereby Dole would provide the farming technology and inputs such as asparagus seedlings. Dole planned to export fresh asparagus to Japan. Under the growing agreement, pricing was subject to a floor price with an escalation should the export market price increase.


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This was a start‐up project and the first commercial‐scale production of asparagus in the country. No commercial banks would lend to the farmers association. The farmers’ only assets were their small agricultural lands titles that were not yet perfected. A government bank, the Development Bank of the Philippines (DBP), was willing to finance the project under its Window 3 Program, which charged less‐than‐commercial rates for developmental projects. The bank determined that the asparagus production was developmental as it involved a new agricultural industry, agrarian reform beneficiaries and foreign exchange earnings. DBP, however, needed a guarantee for the loan. The guarantee was provided by the Guarantee Fund for Small and Medium‐scale Enterprises (GFSME), a quasi‐government agency (now the Small Business Corporation, a government owned financial institution). The GFSME provided an 80% guarantee and Dole Philippines issued a commercial guarantee for 10% for a total of a 90% guarantee on the PHP 30 million loan to the farmers from DBP. Beginning with 90 hectares first planted with asparagus on a commercial scale, more than 3,000 hectares of asparagus have since been planted in South Cotabato and other provinces. Foreign exchange earnings from the export of asparagus mainly to Japan and Europe have made asparagus a major cash crop in the country. Income and employment effects on the local economies have been substantial. Source: ITC (2009) How to Access Trade Finance: A Guide for Exporting SMEs, Geneva: International Trade Commission.

Export Credit Guarantees in times of crisis – the Indonesia case:

When financial institutions do not have confidence in the stability of the importer’s country or in the standing of the financial institution issuing the L/C, confirmed letters of credit become very difficult and expensive – sometimes impossible – to obtain. During the Asian crisis (1998), Indonesian banks had difficulty getting foreign counterparties to confirm the L/Cs they issued on behalf of Indonesian importers because of doubt over the stability of the entire Indonesian financial system. Without confirmed L/Cs, Indonesian importers could not import raw materials needed for their own export production. Both national and bilateral support in terms of export credit guarantees played an important role in freeing up the market. Indonesia’s Central Bank deposited US$1b in 12 foreign banks to guarantee export L/Cs issued from Indonesian banks. They also provided a short‐term hedging facility for exporters to provide additional liquidity. Some relatively stable Indonesian banks also made deposits in foreign banks and used those deposits as cash collateral for their L/Cs. Finally, Japan Export Import Bank (JBIC) provided financing via the Bank of Indonesia to guarantee L/Cs issued by domestic Indonesian banks. Strict qualification requirements restricted its take up in the market initially, but this, later improved. Source: ITC (2009) as above and Chauffour, J.P. and Farole, T. (2010) Trade Finance in Crisis: Market Adjustment or Market Failure in Simon J. Evenett, Bernard M. Hoekman, and Olivier Cattaneo (eds.) Effective Crisis Response and Openness: Implications for the Trading System, Washington DC: World Bank and CEPR.


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Labor Markets, Skills and Firmlevel Technical Efficiency



Labor markets and skills Improvements in labor market regulation – e.g. hiring & firing practices, shift protection from employment to social policy (e.g. unemployment insurance)

Linking regular minimum wage increases with productivity

Training and skills development initiatives including: addressing skills mismatches; pre‐employment skills training initiatives; active labor market training programs to reintegrate the unemployed and disadvantaged back into the workforce

Ensuring greater portability of education and training credentials

Focusing vocational training programs to meet the needs of the private sector

Decentralizing provision of vocational training and facilitating greater private provision

Improving enforcement of labor standards

Firm‐level technical efficiency Programs to support public‐private initiatives for training and vocational education

Encourage high quality business education

Establish a regulatory environment which makes entry easy and which allows quality to determine success

Entrepreneurship development training

Following are brief case studies highlighting good practice policies and initiatives designed to improve

competitiveness through improving labor skills, productivity, and technical efficiency:

Box 2C.5: Training, skills development, and technical efficiency initiatives

Malaysia: The Penang Skills Development Centre (PSCD)

The PSDC is the first skills industry‐led training centre to be set up in Malaysia. It was conceptualized in 1989 out of urgency that for Penang to continue to attract FDIs, its human capital must be trained to keep pace with changes in technology. While the initiative, land and some financial support came from the state and federal governments, with initial support from some of the US electronics MNCs in the state, the leading roles in the centre was private industry. Not only did they provide the initial trainers and equipment, they were also responsible for designing the training programs to meet their needs. PSDC now has 140 members and operates as a non‐profit society. Its mission is to pool resources amongst the Free Industrial Zones and Industrial Estates in Penang to provide up‐to‐date training and educational programs in support of operational requirements, as well as to keep abreast of technological progress. The Centre operates on a full cost basis and companies that sent employees for training there pay for the training. To ensure that the training provided meet the needs of industry the programs were continually upgraded and adapted to evolving skill needs. Today the PSDC caters to the firms in the free industrial zones and industrial parks in Penang where there are (in the late 2007) a total of 1,277 factories employing approximately 220,000 workers. The Centre has trained over 150,000 participants through more than 7,000 courses; pioneered local industry development


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initiatives; assisted in the input and formulation of national policies pertaining to human capital development and contributed directly to the Malaysian workforce transformation initiatives. More recently, the PSDC has set up a new Shared Services Centre, to house Malaysia’s largest Electromagnetic Compatibility Lab which will provide training programs aimed at ‘fast‐tracking’ the work‐readiness of university graduates. The program will be conducted in partnership with member companies to bridge the competency gap of Malaysian graduates and needs of the industry. Initially, the PSDC was unique, buts its model has since been adopted throughout the country – there are now skills development centers in 11 of 13 states in Malaysia.

Source: www.psdc.org.my accessed on May 16, 2010; Penang Skills Development Centre; PenInvest

Honduras: Instituto Politécnico Centroamericano (IPC)

IPC is a non‐governmental, non‐for‐profit, vocational training institute that was founded in 2005. An assessment of Honduras vocational training system had concluded that the system was broken: instructors were incapable of teaching and 95 percent of equipment was stolen, broken or irrelevant. Based on these findings, IPC was established to design courses for current and future workers in all sectors of the economy, including in manufacturing and textiles and clothing. The institute’s objective is to provide workers with relevant skills demanded by industry. Its curricula are hence strongly influenced by input from employers. IPC strives to offer the best technical equipment, curricula and test instructors in the region. For example, a majority of the twelve instructors are brought from North America, Europe and Latin America. In the spring of 2009, IPC had 270 full‐time students and some 1,400 workers that were upgrading their skills in courses lasting between 2 and 18 weeks. A majority of the graduates join the maquila companies: e.g. Gildan, the Canadian company that sponsored the above mentioned study, hires sixty students from IPC every year. Ninety percent of students come from large families earning less than US$ 300/month and the fee for a year of full‐time training is US$1,500. The expenses are partly covered by companies, charitable organization and governments: a U.S. NGO covers transportation and a daily meal; a Swiss company that supplies chemicals to the textiles industry donated a chemistry lab; a French company provided design equipment; an Italian company donated sewing equipment, etc. Roughly 95 percent of the students receive a corporate scholarship that covers 75 percent of the fee. In return they commit to work for the sponsor for 2‐4 years. Foreign multinationals are carrying most of the expenses while Honduran companies are less willing to invest in training and retraining—a pattern that is common throughout the developing world. Source: IPC

Improving quality and technical efficiency in Indian software firms by adopting standards

The leading Indian firms have moved up the value chain in software services, developing organizational and managerial capabilities that enable them to offer more comprehensive services than merely low‐cost programming. One sign of maturity is that the industry increasingly procures fixed‐price contracts, rather than the time‐and‐materials contracts of earlier years. With the greater risk of fixed‐price contracts comes flexibility in organizing work, greater management control, and an opportunity to earn higher returns as efficiency improves. Revenue per worker is increased, indicating a move up the value chain— from an average of $9,000 in fiscal 1995/96 to $20,500 in 2000/2001—but revenues are still lower than what they are in product‐based companies. In order to build client value, companies have expanded their capacity to service a wider range of software‐development tasks, as well as to move into new services, such as product design and information services outsourcing. Software development includes analysis and specification of requirements, software design, writing and testing of software, and delivery and installation. Indian companies are trying to move beyond only writing and testing, which require the least skill and account for only a small portion of the overall


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project costs, to higher skill levels that require deeper business knowledge of the industry for which software solutions are being developed. In their quest to climb the value chain, India’s software firms ensured product quality and reliability by adopting internationally recognized standardized work processes. Because most Indian software firms are export‐oriented and serve clients around the world, meeting globally acceptable frameworks and standards has been critical to validating their credentials to new clients, who often demand that vendors adopt ISO and CMM standards. An increasing number of firms have met international certification requirements for key quality standards. For many, this was an exercise in brand building, but the processes and procedures put in place left their hallmark on the quality of software products and services. Firms seek certification from various sources, beginning with quality management practices that meet ISO 9000 standards to ensure consistent and orderly execution of orders. The next stage focuses on software engineering and certification under the People Capability Maturity Model (CMM) framework of the Software Engineering Institute (SEI) at increasing levels of process maturity. Another stage focuses on aligning internal practices with the CMM, which is a framework to guide attracting, motivating, and retaining a talented technical staff. The Six Sigma methodology ensures end‐to‐end quality across all company operations and focuses on improved customer satisfaction by reducing defects, with a target of virtually defect‐free processes and products. As of December 2003, India had 65 companies at SEI CMM Maturity Level 5. In October 2002, the SEI of Carnegie Mellon University published a list of high‐maturity organizations as part of its Survey of High Maturity Organizations and High Maturity Workshop research. The full set of 146 high‐maturity organizations includes 72 Level 4 organizations and 74 Level 5 organizations. Of the 87 high‐maturity organizations assessed outside the United States, 77 are in India.

Source: Guasch et al (2007) Quality Systems and Standards for a Competitive Edge, World Bank.


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Intermediate Inputs and Backbone Services


Remedies / project components

Inputs and backbone services Institutional reform and capacity building in utilities regulators

Liberalization of utilities markets

Land market reforms – development of a land registry, extension of land use rights periods for FDI, surety of title

Establishment of industrial parks / SEZs

Introduction of PPP legislation / frameworks

Trade policy reform (reducing tariffs / NTBs)

Establishing trade credit lines / other access to finance initiatives

Establishing / reforming duty‐drawback regimes; establishing manufacturing‐in‐bond programs

Box 2C.6 provides some case study examples of good policy practice in improving access to competitive inputs. Box 2C.6: Case examples of good policy practice – intermediate inputs and backbone services

Air services liberalization promotes goods and services exports in Kenya

Like most countries, Kenya air transport market was highly regulated during the 1970s and 1980s. In East Africa, the breakup of the former regional airline, the East African Airways Corporation in 1977, led to the emergence of national carriers, which were subsequently highly protected, with implications on the availability, quality, and price of air transport services. Liberalization of Kenya’s air transport sector began in the late 1990s with regional agreements through COMESA and the East African Community, followed by the establishment of the Kenya Civil Aviation Authority as an autonomous regulator in 2004. But what really catalyzed the development of the sector in Kenya actually preceded these regulatory reforms – the privatization of the national carrier, Kenya Airways in 2006. This led to KLM taking the largest stake in the carrier, and brought in international management expertise. The result was that Kenya Airways has become one of the leading airlines in Africa. Critically, this has facilitated the development of two major sectors of the Kenyan economy. First, the tourism sector benefited significantly by the access to a wider range of domestic and international air services and has become one of the most important employment and foreign exchange earning sectors in the country. Second, the rapid expansion of air freight capacity in Kenya – both through Kenya Airways and the opening up of the market to other airlines, especially dedicated cargo freighters – has facilitated the massive growth in horticultural exports (particularly cut flowers and vegetables) that is a well‐documented Kenyan success story.

Duty Suspension Scheme in Fiji

Fiji’s duty suspension scheme is managed by a private sector organization—The Exporters Club—on behalf of Fiji Islands Revenue and Customs Authority. Members must be in the business of importing materials for transformation into products for export. The Exporters Club assesses the qualifications of applicants, recommends a list of materials to be imported and subsequently used in the production of exports, calculates advance credits and Entitlement Proportion (EP) ratios, and advises Customs when all requirements are met. The exporter receives credits for every dollar of exports achieved under the system. It can use these credits to import approved materials duty free. The credit is based on the EP, that is, the proportion of imported


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goods required to produce one unit of the export product. As long as the company operates within its EPratio, it can continue to import approved goods duty free. The EP is calculated when companies enter the scheme, using the company’s import and export history and an audited set of accounts. For the first export operation, companies can be provided with advance credits that would enable them to import for two months using the credits. Specially developed software has been created for Customs as an attachment to the ASYCUDA system. The software enables the Exporters Club to manage the day‐to‐day operations of the program and Customs to audit arrangements with individual members. Members have access to their own data, but cannot access the details of other members. The Exporters Club is a non‐profit organization owned by eight peak industry groups involved in promoting exports. A Board manages the Club, representing owners and Customs. The Club monitors the performance of each club member through a computerized system that calculates the amount of credits earned and automatically reduces these credits when products are imported. To cover the costs of operation, the Club charges an application and assessment fee, an annual subscription fee, and an activity fee. Source: Duty and Tax Relief Suspension Schemes: Improving Export Competitiveness, World Bank


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Trade Facilitation and Logistics

Table 2C.3: Summary of potential policy remedies and project components (Source: World Bank Trade and Transport Facilitation Assessment Toolkit)


Regulations of transport and logistics services / quality and reliability of transport and logistics services / business practices

Introduce professional standards and certification for logistics services providers

Introduce standard performance contracts for transport and logistics services

Encourage development of large, long‐haul trucking fleets

Create incentives to upgrade transport fleet

Allow increased scale of logistics service providers (mergers & acquisitions)

Encourage integration of logistics services for trade and distribution

Allow introduction of new technologies for tracking and security

Introduce modern supply chain management techniques

Support for national logistics council and other mechanisms for self‐regulation

Customs modernization Reform and automate customs procedures

Improve border facilities

Introduce risk management programs to expedite clearance: a) reduced inspections; b) authorized economic operators

Improve trade security (e.g. scanners, secure supply chains)

Integrate activities of border management agencies

Introduce a single point of entry for information used in clearing cargo

Accept scanned copies for supporting document and e‐signatures

Automate and simplify procedures for sanitary and phytosanitary, and for standards certification

Related procedures and trade facilitation initiatives

Develop public information platforms for sharing trade and logistics data

Introduce e‐government services and e‐signatures to facilitate government approvals

Strengthen capacity of authorities regulating trade and logistics

Improve collection of key statistical information and performance indicators

Develop capacity to analyze indicators and monitor results of policies and investments

Transit regime / air and sea connectivity and liberalization of services

Plan and manage multimodal freight corridors

Develop urban and line‐haul transport interface (e.g. urban truck terminals)

Liberalization / deregulation of air services policies (e.g. introducing 5th freedom or other bilateral freedoms)

Public infrastructure Increase private sector participation to provide and maintain public infrastructure

Introduce commercial management in port and airport operations

Construct new transport links

Upgrade existing transport links


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Plan and manage multi‐country freight corridors

Establish dryports and inland clearance facilities

Develop logistics hubs (e.g. free zones, distribution centers)

Improve telecommunications services to support logistics

Box 2C.7 provides some case study examples of good policy practice in trade facilitation and logistics. Box 2C.7: Case examples of good policy practice – trade facilitation and logistics

Risk Management in Cambodia:

Cambodian importers of raw materials for garment manufacture and subsequent export “are subjected to as many as 64 documentary inspections, physical goods inspections . . . [and] a requirement for over 70 signatures and 12 separate payments . . . . [and] exporters who are exporting ready‐made garments . . . have to fulfil as many as 90 documentary inspections, possibly 100 signatures and 17 different formal payments, in addition to informal payments they have to make in order to get the thing done.”63 The Royal Government of Cambodia has since introduced a comprehensive risk management approach to border management. The approach has consolidated and rationalized the requirements of government agencies involved in the inspection and clearance of goods at the border through:

Raising the level of understanding of all stakeholders—particularly the implementing agencies involved in inspection and audit—of the principles of risk management, compliance management, and information management, and assisting them in the achievement of a strategic approach to risk management and compliance management.

Providing a framework for risk management whereby the inspection of import and export consignments is focused on high risk shipments and maintains a balance between facilitation and control.

Developing an understanding of specific risks Source: World Bank (2011), Border Management Modernization, edited by Gerard McLinden, Enrique Fanta, David Widdowson, and Tom Doyle, Washington, DC: The World Bank.

Cameroon Customs Integrity Initiative:

Within the Cameroonian context, customs is perceived as one of the institutions with the most important problems of transparency. A new program financed by the World Bank and introduced in 2006 was designed to strengthen the chain of command by holding each link accountable—with the assistance of activity, performance, control, and risk indicators—in an effort to improve understanding of activities on the ground, to provide an effective decision making tool, and to reduce corruption in customs. (Lessons of the first phase of the reform were published in Libom Li Likeng, Cantens, and Bilangna 2009.) Cameroon Customs had already carried out steps to strengthen accountability. They included the regular publication of revenue collection data, increased contacts with the business community, automation through the use of ASYCUDA software, and reduced information asymmetry through the use of individual performance indicators. Still, the Head of Customs wanted to initiate a second wave of reforms—to change the behaviors of frontline officials, and to reduce corruption and increase performance. Accordingly, she commissioned the development of an integrity action plan with a specific focus on human resources policies through a monitoring and incentive framework. A pilot was set up and performance contracts for the two largest customs stations were designed. In early February 2010—following a dialogue among frontline officers and senior management—individual and team performance contracts with measurable

63 Penn Sovicheat, Cambodia Ministry of Commerce, speaking at the Consultative Meeting on Trade Facilitation and Regional Integration, Bangkok, August 17–18, 2006.


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indicators were signed. Each inspector’s performance was to be assessed through eight indicators: four related to trade facilitation, four related to the customs clearance process and fines. For each indicator a maximum or minimum value was set based on median monthly values in the three preceding years. An inspector achieved his or her contract if he or she improved performance by 15 percent on all indicators after the six month pilot period. For inspectors below 100 percent contract performance, a system was established that begins with warnings and interviews and can lead to the inspector’s transfer to another customs station. For the best performing inspectors a limited financial bonus is granted, along with nonfinancial recognition. Frontline officers, as well as middle management, supported the initiative because they wished to have their performance assessed on the basis of objective criteria. Early results show that performance contracts have led to decreased clearance times and reduced poor practices, with revenues maintained at the same level as before. Moreover, the contracts have contributed to increased information flow from inspectors to the Head of Customs. Source: World Bank (2011), Border Management Modernization, edited by Gerard McLinden, Enrique Fanta, David Widdowson, and Tom Doyle, Washington, DC: The World Bank.

Document Standardization and Simplification on the Trans‐Kalahari Corridor:

The Trans‐Kalahari Corridor (TKC), the road route between Gauteng province (South Africa) and Walvis Bay (Namibia) via Botswana was opened in 1998, replacing the traditional longer route through western South Africa. Despite major road rehabilitation in 1999, traffic reached only 15 percent of the expected capacity. The major obstacles occurred at the border crossings. This led the TKC Corridor Management Group to seek a partnership with the customs administrations of Namibia, Botswana, and South Africa. This partnership resulted in agreements (October 2000) to extend the operating hours of customs at the Namibia/Botswana border from 22 to 24 hours to enable loading and unloading in Windhoek and crossing the border in the same day. In August 2003, the TKC started a pilot phase to replace all existing transport documents with a single administrative document (SAD). To complement this effort, South African Customs developed a website with details on the SAD process. Border processing times were cut by more than half, from an average time of 45 minutes to 10–20 minutes. According to the United States Agency for International Development (USAID) estimations, reduced border delays created savings of $2.6 million per year along the corridor. As a result, the route had become economical, and traffic flows increased. Operators were moving about 620,000 tons annually along the TKC, about 65 percent of expected capacity, until the Botswanan government increased road user charges in February 2004. In some cases, road charges were multiplied by a factor of 10. The customs problem had been settled, but following this unilateral decision affecting the transport sector, traffic decreased significantly. Source: World Bank (2004), Global Economic Prospects 2005: Trade, Regionalism, and Development: Washington, DC: The World Bank.

Trade Facilitation Committees – the Northern Corridor Stakeholders Consultation Forum:

Since 1999, officials dealing with transport, transit, and private operators along the Northern Corridor (including Ministry of Transport, Ministry of Trade, customs agencies, exporters, and importers associations, etc.) have been regularly meeting twice a year to discuss transit issues. This private‐public sector alliance has produced the following positive developments:

Elimination of charges on imports routed through the port of Mombasa (by Kenya Bureau of Standards and the Kenya Plant Health Inspectorate Service);

Development of a one‐stop processing center; and


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Reduction of the number of required stamps to go through Mombasa port (from 21 to 11). As a result of this forum, national transit and trade facilitation committees are being established in the region. Private sector participation has been extended to include insurance clearing agents, bank associations, shippers’ council, and the like. Public/private partnerships to tackle trade and transport facilitation are also being established in West Africa.

Source: World Bank (2004), Global Economic Prospects 2005: Trade, Regionalism, and Development: Washington, DC: The World Bank.


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Export and Investment Promotion



Export promotion agencies Consolidating agencies dealing with export promotion

Institutional reform and capacity building of EPA

Increasing private sector participation

Developing targeted export promotion strategy

Realigning focus: e.g. support v promotion; new exporters v existing

Improving service delivery through outsourcing – e.g. market research and training

Investment promotion agencies Institutional reform and capacity building

Increasing private sector participation

Developing targeted investment promotion strategy

Development / implementation of anchor investor strategy

Improving aftercare services

Developing / improving online presence

Development of a land bank portal

Box 2C.8: Case examples of good policy practice – export and investment promotion

Spurring Exports in Tunisia through FAMEX

The creation of the Tunisian Export Market Access Fund (FAMEX) in April 2000 marked an important shift of focus for export promotion in Tunisia, away from a trade promotion organization model led by the government to a public‐private sector participatory approach. Acknowledging that firms, not countries, compete, the Tunisian government placed emphasis on individual exporters and their associations. FAMEX helped individual firms implement a systematic strategy to enter, sustain, and expand export markets. The $10 million fund was set up by CEPEX (Tunisia’s export promotion agency) with World Bank assistance. It was privately managed by international and local experts. FAMEX encouraged firms, especially small and medium enterprises, to enter export markets by temporarily covering up to half of the cost of consultant services and providing technical assistance. Services were offered by local consultants and international experts in response to demand from private firms. In the five years that it existed, FAMEX helped 700 firms become exporters, export new products and services, or enter new markets. Estimates indicate that each $1 of FAMEX assistance generated more than $20 of additional exports. A recent survey indicates that 60 percent of the firms that benefited from FAMEX assistance are now willing to pay, or are already paying, full market price for export services (FAMEX 2008). Small export consulting industry has also been created as a result of the program. FAMEX thus served as a catalyst to develop business‐to‐business markets. Source: Nassif (2010)

Coordinating investment promotion to attract Intel to Costa Rica

Costa Rica took advantage of a close‐knit government and business community to organize a flexible, unified effort to attract Intel to set up their US$300m semiconductor plant under the country’s free zone program in 1996. A team was assembled that included the highest level representatives of all relevant government


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ministries and private sector stakeholders, with close involvement of the President. Key to this was the role of the IPA (CINDE). As a non‐profit, autonomous organization, CINDE maintained close ties with government and the private sector and was able to act not only as an effective coordinator of the approach to Intel, but also as a credible mediator between Intel and the government. Figure 2 gives a perspective of the cross‐agency coordination involved in the Intel investment promotion effort in Costa Rica.

Source: reprinted from: Spar (1998)

Ministry for Environment &

Energy

I.C.E. (Costa Rican Electric

Utility company)

Ministry for Public Works &

Transport

Ministry of Finance

Ministry of Science & Technology

Ministry of Education

Technical Institute of Costa

Rica

THE PRESIDEN

CY

Direct involvement of the Presidency

assured action from each government

body Ministry for

Foreign Trade

CINDE (Investment Promotion Agency)

• Director of Investment Promotion (responsible for Free Zones)

• Investment Officer – Human Resources and Education

• Investment Officer – Real Estate, Construction, and Permits

• Director – New York office

After the preliminary presentation, CINDE Costa Rica took over and assigned three full‐time

specialists to attend to Intel’s requests and

questions.

In the initial stages, CINDE coordinated government

involvement.

INTEL

Intel’s first contact with Costa Rica was a presentation made by the Director of CINDE’s New

York office

As the process

continued, the President assigned the Minister of Foreign Trade to coordinate all interactions with the Costa Rican Government – Intel was given top priority.

The Minister held weekly meetings with the President and CINDE to discuss progress

Intel was impressed by the degree of commitment by the President. He hosted members of the site selection team on several occasions and visited Intel’s plant in Chandler, Arizona.


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Standards and Certification

While the policy prescriptions in any one country will be context dependent, certain broad policy issues

need to be considered with regard to the standards environment. These are outlined below:

1. Promoting awareness of standards

It is incumbent on each government or supporting agency to ensure that the producers in their lead and

emerging sectors are aware of the nature and changing portfolio of standards, and of the consequences of

achieving or not achieving them as well as the steps which are required to achieve standards where this is a

feasible and sensible objective. Are governments aware whether their economies possess the certification

bodies and capabilities required to gainfully meet global standards requirements? To what extent do their

standards align with global standards, and does this matter?

2. Ensure that standards do not rule out local suppliers

In some sectors, lead firms specify standards have the unintended consequence of ruling out local

suppliers. This is, for example, a common case in Africa’s mining sector, where the mine‐commissioning

firms often specify the use of standards for items such as electrical fittings and piping which are used in

their home market, but not in the local market. For instance, in Tanzania this has led to the exclusion of

existing suppliers utilizing UK rather than Australian specifications. Particularly in large infrastructural and

mining contracts (where in both there is considerable potential for local linkages), governments need to be

aware of the need for lead‐contractors to utilize those standards which are in currency in the domestic

economy.

3. Role of lead firms in promoting standards

In many sectors, a key driver of standards is the lead‐firms in global value chains. There are, however, two

contrasting outcomes of the standards imposed in corporate‐driven value chains. The first is reflected in

the contributions made to metal‐ and plastics‐working suppliers by global auto‐assemblers. Driven by the

imperatives of lean production, auto assemblers have made it their business to upgrade their suppliers’

performance through the systematic use of standards, setting a moving target of standards which suppliers

need to meet. Attracting these firms as a way of upgrading their supply chains (which also feed into other

value chains and hence have spread effects) has been a core and successful component of government

industrial policy in high‐income and middle‐income countries alike (for example, the UK and South Africa).

4. Government may need to assist firms where lead firms do not

Where lead‐firms do not engage in upgrading their supply chains, a key challenge for policy‐makers is to

ensure that a system of incentives is introduced to enhance both the demand for appropriate standards by

firms wishing to participate gainfully in global value chains, and the capacity of local providers to supply

support for local firms seeking to achieve accreditation. Support for the business services sector is a key

component of this agenda. In some cases this may be provided by the relevant industry association. In

other cases, specialized providers may address the needs of many industries, such as those offering to

assist firms to introduce ISO9000 and ISO14000 standards.


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5. Assisting small‐scale producers

Special problems arise for small firms, since achieving standards‐accreditation may be a relatively costly

process (the costs tend to be fixed, irrespective of scale, and thus adversely affect small producers). One

way of reducing these scale economies is by a group of small producers banding together to share the costs

of certification, both in its initial and then annual re‐certification stages. But this will only diminish the

disadvantage confronting small producers, not remove it. A strategic decision will then have to be made on

whether there is no place for small producers in standards‐intensive global value chains, or whether some

form of subsidized scheme should be established to sustain their participation. This will require a country‐

and sector‐specific set of judgments, balancing off distributional concerns and the upgrading benefits of

standards against their fiscal and economic cost.

6. Targeting low‐income markets

Individual producers, or countries, may actively segment markets, depending on standards requirements.

Some firms – perhaps small‐scale producers – and some production lines may be dedicated to the low‐

income markets, while others develop the standards’ capabilities to participate in high‐income markets.

This is an agenda for firms and their industry‐associations, and for governments engaged in industrial policy

designed to maximize the gains from participating in the global economy.

7. Harmonizing standards and developing countries participation in standards‐setting bodies

Many developing country firms are confronted with a bewildering variety of standards which their

producers have to meet, and at considerable cost. This is perhaps most evident with regard to labor

standards, but it is not unique to labor standards. At the same time, some of the technical industry

standards which are set reflect the operating conditions in high‐income economies – predominantly

temperate climates with pervasive and reliable infrastructure. In these and other cases, low‐income

country governments need to participate actively in standards‐settings in those international fora which are

relevant to producers in their local economy. Particularly for small economies, this may also best be

undertaken through collaborative specialization and through collective action.

Box A.8 provides case study examples of good practice in developing standards programs that support export competitiveness. Box 2C.9: Case examples of good policy practice – standards and certification

Quality standards promote Peru’s asparagus exports

Realizing that it was in the best interest of the country, the leaders of Peru’s asparagus industry and government specialists worked together to bring Peruvian agricultural standards in line with international norms. Both the industry and Peru have greatly benefited as a result. Over the past decade, Peru has quickly risen to become one of the world’s largest exporters of asparagus. This is particularly true for fresh green asparagus, and to a lesser extent for fresh white asparagus and canned asparagus. In 2002, export revenue for all forms and presentations reached $187 million, representing nearly 25 percent of the value of Peru’s agricultural exports. Peru is able to produce quality asparagus year‐round, yet in certain seasons high air and sea transportation costs prevent it from matching prices with inexpensive asparagus from Mexico. Nonetheless, the Peruvians have continued to increase exports and gain market share during their main season by growing asparagus of consistently higher quality that can be internationally certified with respect to good agricultural practices, good manufacturing practices, and HACCP.


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In 1997, Spanish health authorities asserted that two cases of botulism had been caused by consumption ofcanned Peruvian asparagus. Despite assurances from the Peruvian government and companies, press coverage of the botulism scare left an unfavorable impression among consumers in European markets, causing sales to slump in Peru’s leading market. The incident helped motivate the industry and government to take action, by reinforcing the fact that one careless (usually artisanal) exporter could disrupt markets. Beginning in 1998, officials of the Peruvian Commission for Export Promotion (PROMPEX) convinced the asparagus industry to implement the Codex code of practice on food hygiene. PROMPEX specialists worked with industry leaders and production managers to ensure proper implementation. The industry soon saw improved production and processing methods, as well as better product quality and safety. In 2001, national fresh asparagus norms were published. They provided a quality and performance baseline for the industry that allowed many firms and farms to generate the skills and experience needed to be certified under stringent international standards. Many large exporters have reached the level where they can now be certified under the even stricter EUREPGAP protocol. Looking ahead, the Peruvian asparagus industry should be well positioned to adjust to new or more stringent requirements from its trade partners, based on continued strong leadership and public‐private cooperation.

Source: Jaffee et al (2005) Food Safety and Agricultural Health Standards: Challenges and Opportunities for Developing Country Exports, World Bank.

Using standards to develop a quality export brand: the Consorcio del Jamón Serrano in Spain

In 1990, the producers and exporters of air‐dried cured ham in Spain formed the Consorcio del Jamón Serrano Español to harmonize standards and create a quality brand. The Consorcio’s seal, which is given only to hams that meet its standards, guarantees the high quality of the certified product. Under EU regulation, the “Serrano ham” denomination is protected as a Traditional Specialty Guaranteed (TSG). The TSG standard for Serrano ham specifies the method of processing the meat, although it does not refer to a specific processing area or to the origin of the raw material. Cured ham cannot be sold in the EU with the words “Serrano ham” on the label unless it is duly certified as meeting the TSG standard for the product. In addition to meeting the TSG requirements, the Consorcio also imposes its own standards, which in certain aspects are more demanding than the TSG standards. For a ham to earn the Consorcio seal of quality, it must 1. be “Serrano” ham (meeting TSG requirements), produced by a certified company; 2. use only Spanish raw material (Spanish pigs slaughtered in Spain); 3. be processed exclusively in Spain; 4. be cured a minimum of nine months; 5. have a fat covering of at least 1 centimeter (to ensure the ham’s texture and aroma); 6. have shrunk 34 percent in relation to the weight of the original fresh ham; 7. pass an individual sensorial inspection (piece by piece); and 8. be produced by a company that has passed the quality inspections that the Consorcio constantly carries out. The inspections performed by the Consorcio are certified according to the UNE‐EN ISO (Spanish national) standards. The Consorcio strives to ensure that hygienic, temperature, and humidity conditions established in the TSG standard, as well as the boning, slicing, and packaging procedures, are respected during the different stages of the process. In addition, each piece of ham is subjected to visual inspection. A ham that meets all the standards will have a fire seal on the skin with the Consorcio del Jamón Serrano Español logo and will also have a numbered control label. Consumers who purchase the certified products pay a premium price in exchange for the quality assurance that the certification provides. Source: Guasch et al (2007) Quality Systems and Standards for a Competitive Edge, World Bank


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Special Customs Regimes and SEZs



Duty‐drawback and MUB Improving efficiency of reimbursement

Reducing documentation or other administrative requirements

Export processing zones / SEZs Reform of legal and regulatory framework

Addressing institutional design of zones authority

Infrastructure implementation or upgrades

Shifting from traditional EPZ to SEZ models

Establishing or improving “one‐stop shop” services

Box 2C.10: Case examples of good policy practice – special customs regimes and SEZs

Zambia’s duty drawback regime

The refund of duty drawback works more efficiently in Zambia. In order to guarantee duty drawback refunds, the Customs and Excise Division of Zambia has created a ring‐fenced fund at the Central Bank. All import duties paid are deposited into that fund. The fund is then used to pay duty drawbacks within a period of six weeks, following claims. The remaining balance, after all pending drawback payments have been made, is then remitted on a monthly basis to the Treasury. A similar system is used for refunding value‐added tax. Source: UNCTAD (2006)

The MPIP at Ghana’s Tema Free Zone: a new approach for integrating local firms with FDI

As part of the “relaunch” of the Tema zone following the departure of the initial private developer, Business Focus of Malaysia, the Ghana Free Zones Board (GFZB) decided to commit part of the enclave to the non‐export companies. They denominated about 70 hectares of Tema as Multi‐purpose Industrial Park (MPIP), with the support of the World Bank for the development of onsite infrastructure. The MPIP is designed to support the development of smaller‐scale domestic industries and to create linkages with major exporters. Although companies within the MPIP will not have access to a special fiscal and customs regime, the plan for the industrial park is to facilitate competitiveness by establishing critical common infrastructure and cluster‐based business support services. This might include, for example, common packaging and labeling facilities, kiln drying, warehousing, etc. The creation of the MPIP represents an innovative shift in the enclave model in Ghana, becoming that of a “hybrid EPZ” which combines free zone and non free zone investors in the same location. It should offer a substantial opportunity for local firms to become better integrated into the supply networks of exporters in Tema.


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Industry Coordination and Sector Support



Clusters and industry bodies Ensuring cluster / sector targets in line with comparative advantage

Facilitating public‐private dialogue

Provision of key public / coordinating infrastructure

Facilitating the building of networks among cluster participants


Aligning incentives with comparative advantage

Box 2C.11: Case examples of good policy practice – industry coordination and sector support

The role of trade associations in supporting SME export clusters in Italy

In Italy, the main trade associations representing small firms identify cooperation opportunities, suggest ways in which firms can link complementary skills, create contacts among potential partner firms, motivate firms to cooperate, and mediate critical phases in the establishment of a network. In Bologna, one of the three major trade associations, the CAN (Confederazione Nazionale Artiglianato) has about 17,000 member firms, 41 local offices, and 500 employees. The CAN prepares 22,000 pay packers months for 5,000 firms. it keeps the books of 10,000 firms, prepares income tax declarations for most of its members, and organizes 80 training courses a year on subjects ranging from management and business administration to computing and foreign languages. In the 1950s, the CAN established a large assessment and guarantee consortium in Bologna, which now has 7,500 member firms and guarantees some US$12m in loans. So far, it has promoted 41 other consortia dealing with production and joint buying and selling, which now have 8,000 member firms and 42 industrial parks, in which 1,030 small firms are located. Source: OECD (2001) in Word Bank (2010), Innovation Policy: a Guide for Developing Countries

Evolving incentives: the Malaysia case

Like most developing countries Malaysia has used a system of incentives to attract investments. However, the structure of incentives has been continuously revised to meet the evolving national development objectives. By linking the incentives and the provision of specialized infrastructure facilities to skills development and technology upgrading, Malaysia was able to take advantage of the global changes to improve Malaysia's competitive position. The evolution of the system of incentives in Malaysia reflects a shift from general investment promotion to a focus on high‐technology sectors and industrial clusters. The Pioneer Industries Ordinance (PIO) was introduced in 1958 to provide incentives and tariff protection for the development of manufacturing industries. These firms enjoyed tariff protection and tax relief of 2 – 5 years depending on the level of investment. By the late 1960s the need to shelter import substituting industries was overtaken by the need to export. Towards this end, the Malaysia passed the Investment Incentive Act (IIA) in 1968 to encourage employment creation, dispersal of industries and investment of capital‐intensive projects. The incentives provided under the IIA (the Pioneer Status, Labour Utilization Relief and locational Incentives offer tax relief for 2 – 10 years, while Investment Tax Credit offered tax credits ranging from 25 – 40 per cent of capital expenditure) were oriented to attract more labor intensive and export oriented industries, compared to those of the import substituting industries‐oriented PIO.


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In addition, to enhance the role of the manufacturing sector in the economy several new policies and programs were introduced. The most notable was the Free Trade Zone Act of 1971 to allow the formation of Free Trade Zones (FTZs). The main objective was to attract export‐oriented MNCs to invest in Malaysia. Industries operating inside the FTZs would enjoy better (and subsidized) infrastructure, expedited customs formalities and duty free imports of raw materials, components and machinery. This approach to promote export manufacturing was very timely and was successful in attracting the first major wave of export‐oriented electronics manufacturing, concentrated initially in components, to Malaysia. To supplement the FTZ program as well as to promote dispersal of industries to the less developed regions of the country, in 1973, Malaysia introduced the Licensed Manufacturing Warehouse program, which extended similar treatment to individual factories set up outside the FTZs. In 1985 the industrialization process took on a more cohesive program with the announcement of an Industrial Master Plan (IMP) which identified three policy instruments for increasing technology capability, namely, research manpower; institutional arrangements, such as industrial parks; and incentives for R&D. Twelve priority sector development plans were announced as part of a comprehensive strategy to lift Malaysia’s industrial base. To further give the boost to the IMP, the Promotion of Investment Act (PIA) of 1986 was legislated to replace the IIA. Under the PIA, the Labour Utilization Relief incentive was abolished and the Pioneer Status incentives were modified. Promoted industries/projects would enjoy tax relief up to five years regardless of the size of the capital investment. In addition, amendment to the Income Tax Act of 1967 provides tax incentives for training, R&D and reinvestments, and complements the PIA. Other instruments including the exemption of import duty on raw materials, tariff protection for selected industries and financial and credit assistance were used to promote industrial development. These incentives, along with other moves to create a more liberal investment environment, are recognized to be the impetus behind the recovery of the Malaysian economy in the late eighties and the rapid uptake of manufacturing investments. The Second Industrial Master Plan, 1996‐2005 (IMP2) extended its approach beyond export manufacturing operations towards more locally‐integrated clusters with emphasis to encourage the growth of supporting industries, including the services sector. The IMP2 also focused on deepening integration of manufacturing operations along the value chain, through investments in R&D and design capability, development of integrated supporting industries, packaging, distribution and marketing activities to enhance industrial linkages, increase productivity and competitiveness. Since the early 1990s, the investment incentives were increasingly tied to technological deepening, exports, and domestic sourcing of inputs. Beyond these, R&D and training incentives were also introduced. In 1991, a broad reform of Malaysia’s investment policy regime was carried out by phasing out tax incentives for exports and reducing the scope of the Pioneer Status. With these changes, “ordinary” Pioneer Status would qualify for only 60 per cent exemption (instead of the previous full exemption), and the period would be for only three to six years (instead of ten). However full tax exemptions were granted to investments in specific higher‐technology and strategic sectors. Furthermore, MIDA announced that it would screen applications for pioneer status more rigorously using four broad criteria: value added of 30‐50 per cent, local content levels of 20‐50 per cent, depth of technology, and linkage effects.

Source: This is summarized from a background paper prepared for UNCTAD by Lim and Ong (2002).


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Innovation

Policies to support innovation are diverse. First, developing countries still have huge unrealized benefits

from catching up to the frontier. Developing countries should therefore prioritize diffusion, technological

learning, and adaptation of existing technologies. All developing countries have more to gain in terms of

growth and improved living standards from the adoption of technologies that already exist in the world

than from riskier and costlier invention and commercialization of new technologies. A second policy area is

the promotion of appropriate technological learning by grassroots entrepreneurs. These are typically

farmers, artisans, and subsistence entrepreneurs that may have little or no formal education, and that

devise new solutions at the individual or collective level largely through improvisation and experimentation.

A third policy area is the support of incremental adaptation of existing technologies across the range of

informal and formal micro and small enterprises in developing countries. These enterprises are often in

traditional clusters, and are typically characterized by limited deployment of capital, and low technical and

managerial capabilities. Their main challenge is usually not commercializing new technologies but

upgrading quality and productivity by reverse engineering existing technologies. Actually, any policy to

incentivize innovation as a driver of trade competiveness that is designed for broad base development

should take into account that exports are usually concentrated in relatively few firms that continuously

export. A reduced number of firms persistently sell to international markets, accounting however for the

majority of the export value. Therefore policies that aim to develop a broader base of innovative exporting

firms may need to create mechanisms to foster entrance, intensity and permanence in international

markets.

Finally, policies to facilitate integration of firms into global production networks can play a critical role in

facilitating low‐level innovation in low income countries. Indeed, trade in tasks could be a lifeline for

countries yet to industrialize because it simplifies getting started. Starting to export by undertaking a single

task is far less daunting than breaking into the global market for an entire product. In some manufacturing

activities, a production process that eventually generates a finished product can be decomposed into a

series of steps, or tasks. Each task is distinct. It may (a) require distinct skills; (b) use labor and capital in

different proportions; (c) require distinct inputs; and (d) have distinct consequences for the local

environment (UNIDO, 2009). And there is no evidence that task‐based production is less technologically

sophisticated than production of final products. Instead of needing to acquire the entire range of skills

necessary to produce a product all at once, manufacturing can start with specialization in tasks most suited

to the skills available.

Box 2C.12: Case examples of good policy practice – innovation

Innovation and exports: the Chilean and Malaysian cases

In Chile, the government‐run export promotion agency, ProChile has since the late 1970s filled a continuously important function in export expansion, with additional focus on SMEs, through informational, marketing and financial support. The organization’s regional offices play a principal role as direct contact and information points for firms, as do the offshore locations as international promotional networks. The introduction of government funded Centers of Business Development aimed at linking innovation efforts and exports. The centers were introduced in the 1990s as a way to connect and offer support to export‐oriented


251

entrepreneurs in specific sectors. In the case of the wine and salmon industries, which saw surges in their exports in the past decades, this was done through ChileVid, a consortium of wine producing SMEs and Fundacion Chile, a private R&D organization with public sector representation, with focus on production in technology development of salmon farming and vegetables. Through strong FDI promoting incentives in the 1980s and 1990s, attracting mainly U.S. and Japanese firms, Malaysia experienced a surge in exports, mainly coming from exports in electronics sectors. With time, as FDI started flattening out and electronics industries seemed to remain focused on low‐tech products, the Malaysian government began introducing initiatives aimed at moving current electronics production up the value chain and supporting R&D activities. More importantly, large efforts were made to initiate an export led growth strategy and diversify the country’s export basket away from tin and rubber, mainly by focusing on electronics and palm oil industries. Malaysia has consequently managed to put into operation a public promotion program, covering, but not limited to, export allowances, tax incentives, loans, training, R&D support, as well as infrastructure and information services. The main trade promotion agency, MATRADE, has as main functions coordination of the country’s broad public and private export promotion network, the assistance of Malaysian firms in developing their international trade as well as provision of information, marketing and training services. Efforts are made for stronger private sector partnership and more representation on the board of private enterprises.

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Acronyms AAA Analytical and Advisory Assistance ITU International Telecommunications

Union

ACP African, Caribbean and Pacific KILM Key Indicators of the Labor Market

AGOA African Growth and Opportunity Act km kilometer

AGR Aggregate L/C Letter of Credit

ASEAN Association of Southeast Asian Nations

LAC Latin America and Caribbean

ASYCUDA Automated System for Customs Data LDC Least Developed Country

ATC Agreement on Textiles & Clothing LIC Low Income Country

LMIC Lower Middle Income Country

BoP Balance of Payments (MA)OTRI / TTRI

(Market Access) Overall Trade Restrictiveness Index / Tariff Trade Restrictiveness Index

BPO Business Process Outsourcing MDB Multilateral Development Bank

BRIC Brazil, Russia, India, and China MFA Multifibre Arrangement

BTA Bilateral Trade Agreement MFN Most Favored Nation

CAN Confederazione Nazionale Artigianato MNC/E Multinational Company / Enterprise

CEM Country Economic Memorandum MPIP Multi‐Purpose Industrial Park

CEPEX Centre de Promotion des Exportations de la Tunisie

MSC Marine Stewardship Council

CEPII Centre d'études prospectives et d'informations internationales

MUB Manufacturing Under Bond

CFA Catfish Farmers of America N/A not applicable or not available

CFAD Sustainably managed forest concessions

NAFIN Nacional Financiera

CIC Investment Climate Advisory Services NAFTA North American Free Trade Agreement

CIF Cost, Insurance, Freight NAMA Non‐Agricultural Market Access

CINDE Costa Rica Investment Promotion Agency

NCP National Competition Policy

CMM Capability Maturity Matrix nes / n.e.s. not otherwise specified

COFEMER Comisión Federal de Mejora Regulatoria

NGO Non Governmental Organization

COMESA Common Market for Eastern and Southern Africa

NTB / NTM Non‐Tariff Barrier / Measure

CVD Countervailing Duty OECD Organization for Economic Cooperation and Development

DANIDA Danish International Development Agency

OHSAS Occupational Health & Safety Accreditation Standard

DB Doing Business OLS Ordinary Least Squares

DEC (TI) Development Economics (Trade and PIA Promotion of Investment Act

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Integration)

DRC Domestic Resources Cost PIO Pioneer Industries Ordinance

DTIS Diagnostic Trade Integration Study PPP Purchasing Power Parity

EBA Everything But Arms PREM Poverty Reduction and Economic Management

ECA Export Credit Agency PRMTR PREM Trade

ECGA Export Credit Guarantee Agency PRODY (Revealed) income content of product

ECOWAS Economic Community of West African States

PSDC Penang Skills Development Council

EICC Electronic Industry Code of Conduct R&D Research & Development

EM Extensive Margin RCA Revealed Comparative Advantage

EP Entitlement Proportion RER Real exchange rate

EPA Economic Partnership Agreement or Export Promotion Agency

RFI Revealed Factor Intensity

EPZ Export Processing Zone RHCI Revealed Human Capital Index

ES Emergency Safeguard or Enterprise Survey

ROO Rules of Origin

ESW Economic and Sector Work ROW Rest of World

EU European Union RPCI Revealed Physical Capital Index

EXPY (Revealed) income content of export basket

RTA Regional Trade Agreement

FAMEX Fonds d' accès aux marchés extérieurs SAD single administrative document

FAO Food and Agricultural Organization SAFTA South Asia Free Trade Association

FSC Forestry Stewardship Council SAR South Asia Region

FDI Foreign Direct Investment SB science based

FPD Financial and Private Sector Development

SCM Subsidies and Countervailing Measures

FTZ Free Trade Zone SD supplier dominated

FVO Food and Veterinary Office SEI Software Engineering Institute

GATT General Agreement on Tariffs and Trade

SGS Societe Generale de Surveillance

GATS General Agreement on Trade and Services

SI scale intensive

GCI Global Competitiveness Index SI(T)C Standard International (Trade) Classification

GDP Gross Domestic Product SEZ Special Economic Zone

GFSME Guarantee Fund for Small and Medium‐scale Enterprises

SQF Safe Quality Food

GFZB Ghana Free Zones Board sqm square meter

GIPB Global Investment Promotion Benchmarking

SS specialized suppliers

GLI Grubel‐Lloyd Index SSA Sub‐Saharan Africa

GLOBAL‐ Global Partnership for Good STEM Science, Technology, Engineering,

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GAP Agricultural Practice Mathematics

GMP Good Manufacturing Practice T&C Textiles & Clothing

GNI Gross National Income TBS Tanzania Bureau of Standards

GSTP Generalized System of Trade Preferences

TCD Trade Competitiveness Diagnostic

HACCP Hazards Analysis Critical Control Points

TCI Trade Complementarities Index

HAI Human Assets Index TE Technical Efficiency

HH(I) Hirschman‐Herfindahl (Index) TFP Total Factor Productivity

HS Harmonized Commodity Description and Coding System

TII Trade Intensity Index

IATA International Air Transport Association

TKC Trans‐Kalahari Corridor

ICA Investment Climate Assessment TRAINS Trade Analysis and Information System

ICRG International Country Risk Guide TRQ Tariff Rate Quota

ICS Investment Climate Survey TSG Traditional Speciality Guaranteed

ICT(ES) Information & Communications Technology (Enabled Services)

TTF(A) Trade and Transport Facilitation (Assessment)

IEMP Index of Export Market Penetration TTL Task Team Leader

IFC International Finance Corporation UDE Economic Deregulation Unit

IIA Investment Incentive Act UN United Nations

ILO International Labour Organisation UNCTAD United Nations Conference on Trade and Development

IM Intensive Margin UNIDO United Nations Industrial Development Organization

IMF International Monetary Fund USAID United States Agency for International Development

IMO International Maritime Organization VER Voluntary Export Restraint

IMP/IMP2 Industrial Master Plan / Second Industrial Master Plan

WDI World Development Indicators

I‐O Input‐Output WEF World Economic Forum

IP Intellectual Property WHO World Health Organization

IPA Investment Promotion Agency WIPO World Intellectual Property Organization

IPC Instituto Politécnico Centroamericano WITS World Integrated Trade Solution

ISIC International Standard Industrial Classification

WTI World Trade Indicators

ISO International Standards Organization WTO World Trade Organization

ITC International Trade Commission

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Product Classifications

Classification of Products (HS 2 digit)

(Harmonized Commodity Description and Coding System)

These 8 categories are adapted from Hanson (2010).

(1) Agriculture, meat and dairy, seafood (HS 1‐10, 12‐14) ‐‐ land intensive activities surrounding

agriculture production

(2) Food, beverages, tobacco, wood, paper (HS 11, 15‐24, 44‐48) ‐‐ manufacturing activities that

use agriculture, forestry, and other land intensive inputs

(3) Extractive industries (HS 25‐27, 68‐71) ‐‐ nonmetallic minerals, ores, petroleum, precious

stones, precious metals, and other industries based on sub‐soil resources

(4) Chemicals, plastics, rubber (HS 28‐36, 38‐40) ‐‐ manufacture of chemicals and other

petroleum‐based products

(5) Textiles, apparel, leather, footwear (HS 41‐42, 50‐65) ‐‐ the production of labor intensive

clothing and apparel items and the inputs for these goods (textiles and leather)

(6) Iron, steel, and other metals (HS 26, 72‐83) ‐‐ production of iron, steel, and other metals

(7) Machinery, electronics, transportation equipment (HS 84‐89) ‐‐ production of skill and

capital‐intensive machinery, electrical materials, electronics, and transport equipment

(8) Other industries (HS 37, 43, 49, 66‐67, 90‐97) ‐‐ collection of remaining manufacturing

industries (photographic material and equipment, fur, printed material, umbrellas, hats,

musical instruments, arms, furniture, toys, miscellaneous items)

Classification of Products (SITC 2 digit)

(Standard International Trade Classification, Rev. 2)

These 10 categories are adapted from Leamer (1984) and Felipe et al. (2010).

(1) Petroleum: petroleum and petroleum products (33)

(2) Raw materials: crude fertilizers and crude minerals (27); metalliferous ores (28); coal, coke,

briquettes (32); gas (34); electric energy (35); non‐ferrous metals (68)

(3) Forest products: wood, lumber, cork (24); pulp, waste paper (25); wood, cork, manufactures

(63); paper paperboard (64)

(4) Tropical agriculture: fruits, vegetables (05); sugar (06); coffee, tea, cocoa, spices (07);

beverages (11); crude rubber (23)

(5) Animal products: live animals (00); meat (01); dairy (02); fish (03); hides, skins, furskins (21);

crude animal and vegetable minerals (29); animal, vegetable oils and fats (43); animal, live

n.e.s. (94)

(6) Cereals: cereals (04); feeds for animals (08); miscellaneous food preparations (09); tobacco

(12); oil seeds, oil nuts, oil kernels (22), textile fibers(26); animal oils, fats (41); fixed vegetable

oils (42)

(7) Labor intensive: non‐metallic mineral manufactures (66); furniture (82); travel goods,

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handbags (83); clothing (84); footwear (85); misc. manufactured articles, n.e.s. (89); postal

packages (91); special transactions (93); non‐gold coins (96)

(8) Capital intensive: leather (61); rubber (62); textile, yarn, fabrics (65); iron and steel (67);

manufactures of metal (69), sanitary fixtures, fittings (81)

(9) Machinery: power generating (71); specialized for particular industries (72); metalworking

(73); general industrial (74); office and data processing (75); telecommunications (76);

electrical (77); road vehicles (78); other transport equipment (79); professional and scientific

instruments (87); photographic equipment (88), armored vehicles, firearms and ammunition

(95)

(10) Chemicals: organic (51); inorganic (52); dyeing and tanning (53); medicinal and

pharmaceutical (54); oils and perfume (55); fertilizers (56); explosives (57); artificial resins and

plastic (58); chemical materials, n.e.s. (59).

APPENDIX

272

Summary of recent papers on determinants of trade competitiveness

This Toolkit makes reference to an extensive literature related to trade competitiveness. This annex

presents a more detailed summary of four recent papers – two of which were commissioned as

background to this project –that explore determinants of different dimensions of export performance

and are thus closely related to the general objective of this toolkit. The first, Carrere et. al. (2011), seeks

to identify several drivers of export diversification as a base to prescribe policy recommendations in

developing countries. The second, Hallaert et. al. (2011), identifies and quantifies the severity of binding

constraints to trade expansion in developing countries in general and in some categories of countries –

landlocked countries, small and vulnerable economies, and commodity exporters– in particular. Finally,

in the two papers commissioned for this report: Şeker (2011) investigates the possible reasons that

prevent convergence of countries in export performance; while Cusolito (2010) sheds light on the

relationship between export competitiveness and the extensive and intensive margins of international

trade.

Trade Diversification: Drivers and Impacts. Céline Carrère, Vanessa Strauss‐Kahn, and Olivier Cadot (2011). Mimeo. The World Bank

This article proposes a quantitative assessment of the main determinants of export diversification. The

authors begin by addressing the issue of how export diversification is measured and what the stylized

facts are about export diversification across time and across countries. Then, they move to identify the

potential determinants of export diversification. Finally, they tackle the relationship between export

trade diversification, growth and employment. This work is important because it provides some insights

on policy prescriptions which aim to achieve export diversification by pointing out several drivers of

diversification (e.g, infrastructure, education, or governance).

The authors employ the Theil index to examine how concentration (diversification) has evolved over

time on 134 countries. They take advantage on the decomposability property of this index to identify

changes in diversification within‐groups (the intensive margin of trade) and between‐groups (the

extensive margin of trade). They define two groups to be analyzed: group one is made of active export

lines for a country‐year pair whereas group “zero” is made of inactive export line (i.e. export lines for

which there are no exports). Results confirm previous finding of a U‐shaped relationship between export

concentration and income and, most importantly, indicate that most of the concentration in levels

occurs at the intensive margin (in goods that are long‐standing exports) while changes in concentration

are at the extensive margin (figure 1).

Next, the authors take account of the main variables used in the literature and propose a quantitative

assessment of the main determinants of export diversification. Specifically, they regress the overall Theil

index, the within‐groups Theil, the between‐groups Theil, and the number of exported products on 10

variables using a panel database including 87 countries over the 1990‐2004 period. Country and year

fixed effects control for unobservable characteristics in all regressions. Table 1 reports the results.

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273

Figure 1. Contributions of within‐and between‐groups to overall concentration, all countries

Table 1 Diversification drivers in a panel dataset, 1990‐2004, 87 countries

Notes: Robust standard errors in italics, with * meaning that the correspondent coefficient is significantly different from zero at 10%; ** significant at 5%; *** significant at 1%

Results confirm the U‐shaped tendency of income on export diversification. The results also show that,

once controlling for GDP per capita, infrastructure appears as an important driver of diversification: a

10% increase in the infrastructure index decreases the Theil’s index by about 0.7%. Remoteness also has

23

45

6

0 10000 20000 30000 40000GDP per capita, PPP (constant 2005 international $)

Between

Within

Total Theil

APPENDIX

274

the expected sign: the more remote the country, the lower its export diversification (i.e., the higher its

Theil) essentially in terms of the extensive margin and number of products. The analysis thus confirms

that high distance to importers increases the export fixed cost and consequently drastically reduces

export diversification. Preferential market access is clearly an important factor of diversification at both

margins. In contrast, net inflows of FDI (in % of GDP) seems to concentrate exports value on some

products and thereby increases concentration at the intensive margin. This result could be expected as

multinational specialize in specific products which they produce in high volumes. They also find a

significant impact of education on export diversification. A 10% increase in the years of schooling

reduces the Theil index by 1.1% and increases the numbers of exported products by 6.2%. Similarly, the

quality of institution appears clearly significant with a positive impact on diversification. Finally, as

expected, the larger the population, the more diversified the economy.

As noted by the authors, these results should be seen with caution. The regressions are informative of

the factors that have a significant impact on diversification and of the sign of this impact once controlled

for others factors. It is difficult however to rank these factors and clearly isolate single impact due to

potential multicolinearity issues existing between these variables.

Next, the authors single out the role of trade liberalization as a driver of diversification. To do so, they

combine the Theil index of export concentration computed at the HS6 level for 1988‐2006 with the

trade liberalization date of Wacziarg and Welch (2008). The sample used includes 100 countries, 62

Middle income and 38 Low income countries over 1988‐2006, with respectively 68% and 49% of

country‐year observations occurring in liberalized regimes. Then they run fixed‐effects regressions of the

Theil index on a binary liberalization indicator defined by the dates of liberalization (equal to one when

liberalized) to assess the within‐country effect of trade liberalization on the diversification of exports.

Specifically, they use a difference‐in‐difference approach given by:

where

Theilit is the Theil index of country i exports in year t, LIBit a dummy equals to 1 if t is greater

than the year of liberalization (defined by Wacziarg and Welsh) and 0 otherwise. i and t are

respectively country and year fixed effects. The sample is not restricted to countries that underwent

reforms. Results are reported in table 2.

Table 2 Fixed‐Effects Regressions of Diversification index on Liberalization Status

Theilit i t LIBit it

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275

Note: * means a significant coefficient (at 10% level) standard errors in parentheses, heteroscedasticity consistent and adjusted for country clustering.

The regression shows a highly significant within‐country difference in export diversification between a

liberalized and a non‐liberalized regime (reported in Table 2 column 1), with a coefficient twice as high

for middle‐ than for low‐income countries. They also regress equation (1) using the Theil index’s

decomposition (within‐groups vs. between‐groups). Results are reported in Table 2 columns (3)‐(6).

Controlling for country and year effects, the results suggest that middle income countries that

undertook trade liberalization reforms have a significantly more diversified structure of exports along

the intensive margin. By contrast, low‐income countries diversify mostly along the extensive margin.

Overall, this work suggests that poor countries have, on average, undiversified exports. As they grow,

they diversify, and then re‐concentrate at high income levels. The extensive margin (new products)

dominates the action in terms of diversification, but the intensive margin (higher volumes) dominates

the action in terms of export growth. Thus, if governments are ultimately interested in export (and

employment) growth, the intensive margin appears as a better bet. The reason is that there is enormous

churning, so that many of today’s new products are tomorrow’s failed products.

Estimating the Constraints to Developing Countries Trade. Jean‐Jacques Hallaert, Ricardo

Cavazos and Gimin Kang (2011). Mimeo OECD.

This article adds to the literature by identifying and quantifying the severity of binding constraints to

trade expansion as well as by assessing the role of complementary policies in affecting trade reforms

impact on economic growth. While the authors acknowledge that constraints to trade expansion are

largely country‐specific, they empirically test the role of these constraints in a cross‐country exercise

that is used as a benchmark against which the specific needs of three country groupings: Landlocked

countries, small and vulnerable economies, and commodity exporters. This analysis is complemented by

two case studies (Uganda and Azerbaijan) aim at providing illustrations of the mechanisms highlighted

by the econometric work, but also the importance of some variables that the econometric work could

not capture because of data limitations.

The empirical work to determine the impact of the variables identified as the binding constraints on

Liberalization (LIB) -0.190* -0.075 -0.100*(2.0) (0.8) (2.8)

LIB - Middle Income -0.241* -0.271* 0.067(2.0) (2.0) (0.5)

LIB - Low Income -0.138* 0.053 -0.209*(1.6) (0.5) (2.0)

Number of Obs.Number of countries PeriodCountry fixed effectsYear fixed effectsR² within 0.39 0.39 0.28 0.29 0.75 0.75

Theil Theil-within Theil_between

Yes

1394100

1990-2004YesYes

1794100

1988-2006YesYes

1394100

1990-2004Yes

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276

trade and, subsequently, the impact of trade on growth is composed of two stages. 64 They employ a

Two Stage Least Squares estimator (2SLS) where the first stage quantifies the magnitude and direction

of the direct effect of the binding constraints on trade indicators65 (exports, imports, and openness)

whereas the second stage quantifies the magnitude and direction of the composite effect of the binding

constraints on the economy‘s growth rate through their effect on trade indicators. The first stage is then

given by:

, ,

where Trade is defined as above; W is a vector of exogenous variables in the model which determine the

country‘s level of trade, this includes the ones related to the binding constraints and a constant; GDP

represents initial , , τ is a parameter to be estimated, , represents the regression error term,

and are also parameters to be estimated. The second stage regression is given by:

Δ , ,

where Δ is the change in real GDP, , represents initial GDP, is the predicted value of the trade indicator in stage one (exports, imports, or openness), is the amount of

investment in the country as a share of GDP (investment is part of this equation as it is a key

determinant of growth and because literature has shown that it is an important channel of the impact of

trade on growth), X is a vector of other variables affecting GDP growth, , represents the regression error term, and the and are parameters to be estimated.

This model is estimate on a database of 65 countries recipients of Official Development Assistance

(ODA) covering the period from 1981 to 2009. These countries account for 57% of the aid for trade

disbursed since the inception of the Aid for Trade initiative (i.e. 2005‐2008) and 55% of 2008 aid‐for‐

trade commitments. Results for the whole sample of countries are reported in table 3.

In summary, the results for the unrestricted sample show five main findings: 1) In line with economic

literature, both imports and exports boost economic growth but the constraints to exports differ from

the constraints to imports. 2) Despite recent trade liberalization, a cut in import tariffs can still boost

64 The motive for using a two‐stage procedure is the presence of an endogenously determined variable in the growth regression, the level of trade. Previous literature has shown the reverse causality between trade levels and GDP growth. 65 The reason behind the idea of splitting the impact of binding constraints on openness into impact on exports and impact on imports hinges on the political‐economic developments of the Aid for Trade initiative. In the Hong Kong declaration (WTO, 2005) the stated objective of the initiative was actually to “expand trade”. However, the role of imports, in explaining growth and in trade policy analyses is largely underestimated and not well understood. Part of the difficulty in explaining the role of imports in growth probably comes from limited data availability. Theory suggests that imports may foster growth via a more efficient reallocation of resources, ameliorations in domestic manufacturing by lowering the cost of inputs and of capital goods, allowing better access to foreign technologies, etc. Most of these gains are dynamic; for instance imports increase productivity which is a major determinant of economic growth and in per capita income. The impact of imports on economic expansion is not limited then, to the technology embedded into imports but also arises from competition from cheaper imports.

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277

exports and imports performance, but the impact is small compared to other constraints 3) Electricity

appears to be the main constraint to trade expansion; this is less related to availability than to reliability.

4) Air transport, labor force, labor productivity and rule of law are important factors impacting exports

but not imports; while investment, access to domestic credit, and mismanagement of the real effective

exchange rate appear to remarkably affect imports but not exports. 5) The results confirm the

importance of complementary and compatible policies (education, governance, business environment,

and macroeconomic stability) that are very important for trade expansion and economic growth as they

affect factors having a large impact on trade performance such as investment, labor productivity, and

labor participation.

How do the binding constraints differ from these general results for the various country groupings? The

authors shed light on this question by looking at three different country groups (landlocked countries,

small and vulnerable economies, and commodity exporters) to identify the most binding constraints for

each group. The highlights of the main results follow.

Table 3

Results for the Unrestricted Sample

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278

Landlocked countries (LLC)

LLCs face particular constraints that significantly diminish their trade integration. The openness ratio is

reduced by 5%, just for the fact of being a landlocked country. Electricity is the main problem followed

by tax rates, access to finance and transportation. The growth effect of trade appears to be slightly

larger in LLCs than in the benchmark scenario: an increase of 10% in the openness ratio will determine

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279

an increase of growth rate of 1.6% (compared to 0.8%/1.1% of the unrestricted sample). This is valid

both for imports and for exports.

Poor domestic policies account as one of the factors responsible for the low trade performance of LLCs.

Restrictive trade policies (measured by customs tariff) seem to have more impact on trade performance

of LLCs than in other countries. A 10% appreciation of the real effective exchange rate would lead to a

drop of about 1% of export, import and openness ratios. Access to credit instead appears not to be a

significant constraint to trade expansion in LLCs.

Small and vulnerable countries (SVE)

The authors define SVEs as countries whose share in global market does not exceed 0.12% and whose

population does not exceed 15 million. According to these criteria, and give the available data, 36 ODA

eligible countries are defined as SVEs. In these countries, the size of the State limits the diversification

opportunities of production. This would result, other things being equal, in a larger import‐to‐GDP ratio.

More in detail, SVEs are characterized by a physical isolation, geographical distance from the main

markets, high transport and transit costs, minimal or no export product diversification, dependency

upon very few export markets, low competitiveness, difficulties in attracting FDI and susceptibility to

natural disasters.

SVEs are open to trade by necessity. Export concentration reduces significantly their openness: the

Herfindhal Index (HS4 digits, SVEs export concentration, 2000‐2007) equals 0.176, which is much higher

than the index for non‐SVEs (0.145) or LDCs (0.127). Furthermore, the small size of their labor force is a

very important statistical constraint: a 10% increase in the labor force would increase the openness ratio

by more than 3% of GDP.

In SVEs, the relevance of the electricity problem appears larger than any other group. Transportation

issues seem to be more severe than for the average country but less than for LLCs. According to the

estimations, quality of road infrastructure affects largely trade openness in SVEs: a 10% increase in

paved roads would augment openness by 3%‐5% of GDP. Similarly, a 10% increase in road density would

increase openness by about 2% of GDP. Finally, the impact of roads on the whole economic growth

would be substantial: a 10% increase in the quality of roads should increase the economic expansion by

more than 0.4%, mainly through trade.

Electricity is the main constraint for SVEs’ exporters. The problem is, in particular, associated with the

reliability of electricity. Telecommunication infrastructure, given the remoteness, landlockedness and

insularity of most of these countries, also represents a major issue of constraints: increasing the number

of fixed telephone line per 100 inhabitants would increase the trade openness ratio by 0.2%.

Supportive macroeconomic policies are also essential for the sustainability of trade reforms. While the

impact of the mismanagement of the exchange rate appears more limited in the case of SVEs, the

impact of government spending remains absolutely significant, much more than for the unrestricted

sample. Estimations results show that focusing on tariff reforms would not affect significantly SVEs. The

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280

biggest impact would be given by the complementary policies, in particular by addressing the export

concentration issues. Access to credit is also a major impacting factor: a 10% increase in credit to the

private sector would increase all trade ratios by 3%‐4% of GDP.

Commodity exporters

This group is defined by countries for which raw materials account for more than 45% of goods exports.

The impact of trade on the whole economic growth appears to be smaller in magnitude than for any

other country group: a 10% increase of openness ration would increase the economic growth to 0.09%‐

0.17%. In short, it seems that their high export concentration makes them more vulnerable to world

commodity prices.

The tariff regime appears to be a more important constraint for commodity exporter than for other

country groups: a 10% cut in tariffs would augment the export‐to‐GDP ratio by 0.2%‐0.6% and the

import‐to‐GDP ratio by 0.2%‐0.3%. Electricity also appears to be a major constraint (more in terms of

availability rather than in terms of reliability): A 10% increase in electricity consumption is associated

with an increase of 4% of the export‐to‐GDP ratio and of 1.6% of the openness ratio.

Complementary policies aiming at boosting investment have a positive impact on trade openness for

commodity exporters. According to the results, an increase in investment would have a significant

impact mainly for imports (while it had a remarkable significance for both importers and exporters, in

the case of SVEs and LLCs). This may be due to the specificities of the investment in commodity

countries and to the impact of a Dutch disease.

Interestingly, in the case of Commodity exporters, property rights are a very significant statistical

variable. More in details, it is very significant (and negative) for imports, and basically insignificant for

exports. A 10% increase in the property right variable will determine an increase of 2.3%‐2.5% of GDP of

the openness ration for the unrestricted sample but will cause a reduction of 1.2% of GDP in the

commodity exporter group.

Trade Policies, Investment Climate, and Exports Across Countries. By Murat Şeker (2010).

World Bank Policy Research Working Paper No. 5654.

This study investigates the possible reasons that prevent convergence of countries in export

performance. It uses a dataset that comprises countries with various income levels and from different

regions of the world to shows how trade policies, trade facilitation, and investment climate (IC) variables

affect export performance.

To accomplish this goal, the author uses two indices to measure the restrictiveness of tariff policies. The

first is the trade tariff restrictiveness index (TTRI) which shows the restrictiveness of domestic trade

policies on imports. The second is the market access trade tariff restrictiveness index (MATTRI) which

shows the ease of foreign market access of the country. Unlike simple or weighted average tariff rates,

these indices are well grounded in trade theory and provide sound aggregate measures of trade

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281

restrictiveness.

The author focuses on six indicators each representing a different aspect of the investment climate.

These indicators are regulatory quality, trade facilitation, entry regulations, access to finance,

infrastructure, and property rights. Although there are a number of studies that analyze how some of

these indicators affect export performance, none of them have looked at the interaction of these

indicators with the restrictiveness of foreign market access.

Regulatory quality captures the capability that a government has to carry out sound policies that

facilitate private sector development and is obtained from Worldwide Governance Indicators (WGI). It

fluctuates between ‐2.5 and 2.5 (high scores corresponds to better outcomes). Access to finance

measures financial development. It corresponds to the log of money divided by quasi money (M2) to

GDP collected by World Bank’s Development Indicators. Entry regulations measure is an index that tells

how many procedures are needed to start a business. Trade facilitation is measured by country’s

customs efficiency. Time to export is counted as the log of the number of days needed to export a good.

Infrastructure represents the quality of overall infrastructure (e.g. transport, telephone, and energy). It

varies between 1 and 7, where 1 corresponds to very low rating. Finally, property rights is an index

obtained from Economic Freedom of the World database and ranges from 1 to 7 as well.

The dataset covers three years of observations between 2005 and 2007 for 137 countries. It is not

balanced as there are variables which have missing observations for some of the countries. The data

includes countries from six regions of the world and five income groups. The primary estimation method

is pooled ordinary least squares method (OLS). The estimation equation is presented as follows.

.*)log()log(

)log()log()log()log()log()log(

200710200691181716

152,1432110

ititititit

ittitiiitit

ddIndicatorMATTRIIndicatorMATTRI

TTRIExpGrowthremoteAreaGDPExport

The results of estimating this equation are presented in table 4. GDP is a strong correlate of high export

performance which is a common finding in gravity models. On the other hand, large and remote

countries export less. Ten percent increase in the remoteness of the country decreases export sales by

4‐5 percentage points. Past export growth also contributes significantly to the current export

performance. Lastly, trade restrictiveness index which measures the stringency of domestic trade

policies on imports negatively affect exports. This shows that there is complementarity between

importing and exporting activities which could be caused by exporters’ extensive usage of imported

intermediate goods.

The author uses the market access restrictiveness index (MA‐TTRI) as a proxy for foreign market access.

The table shows that difficulties in market access significantly decrease export performance. In four of

the six specifications, its coefficient is negative and significant. Ten percent increase in market access

lead to 2 to 8 percentage points increase in exports. Among the investment climate indicators, the

significant ones are in accordance with the empirical findings in the literature. Better regulatory quality,

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282

quality of infrastructure, and protection of property rights lead to higher export sales whereas the

inefficiencies in trade facilities decrease exports. The interaction terms between market access and IC

indicators are significant with the expected signs in all specifications. This shows that improvements in

investment climate would make larger contributions to increasing export performance of countries with

low foreign market access relative to the ones with high foreign market access. Firms in a country with

low foreign market access have to be more competitive and efficient in export markets in order to be

able compete with those firms in more open countries. Hence, the marginal contribution of

improvements in investment climate to export sales will be relatively more in countries with low foreign

market access.

Table 4

Estimation Results with Pooled OLS Method

Regulations Finance Entry

Time to

Export Infrastructure Property

RealGDP(PPP) 0.989 1.006 1.064 0.976 0.978 0.994

(0.031)*** (0.045)*** (0.034)*** (0.032)*** (0.030)*** (0.034)***

Log(Area) ‐0.082 ‐0.081 ‐0.129 ‐0.060 ‐0.079 ‐0.091

(0.035)** (0.043)* (0.043)*** (0.037) (0.040)** (0.041)**

Remoteness ‐0.384 ‐0.470 ‐0.422 ‐0.474 ‐0.504 ‐0.533

(0.155)** (0.188)** (0.182)** (0.157)*** (0.163)*** (0.175)***

Export Growtht,t‐1 0.094 0.094 0.077 0.101 0.134 0.121

(0.046)** (0.060) (0.049) (0.047)** (0.048)*** (0.047)**

log(TTRI) ‐0.265 ‐0.498 ‐0.458 ‐0.432 ‐0.397 ‐0.411

(0.094)*** (0.111)*** (0.109)*** (0.085)*** (0.084)*** (0.096)***

log(MATTRI) ‐0.185 ‐0.805 0.202 0.269 ‐0.526 ‐0.536

(0.046)*** (0.318)** (0.131) (0.257) (0.170)*** (0.167)***

log(MATTRI)*Indicator 0.124 0.173 ‐0.037 ‐0.141 0.299 0.058

(0.055)** (0.089)* (0.011)*** (0.077)* (0.117)** (0.025)**

Indicator 0.281 ‐0.028 0.004 ‐0.345 0.599 0.114

(0.076)*** (0.139) (0.021) (0.134)** (0.195)*** (0.039)***

Constant 3.493 4.357 2.915 5.761 4.321 4.457

(1.612)** (1.959)** (1.843) (1.671)*** (1.591)*** (1.833)**

Observations 205 175 204 203 193 189

R‐squared 0.953 0.933 0.944 0.952 0.954 0.954

* Pooled OLS results. Robust standard errors clustered by country are in parentheses. All regressions control for year

fixed effects.*** p<0.01, ** p<0.05, * p<0.1.

Using the estimation results reported in this table, the author computes total impacts of one standard

deviation change in investment climate indicator on growth rates of export sales. To show how

countries with different levels of foreign market access benefit from this improvement, the author

compares 25th and 75th percentiles of foreign market access restrictiveness index which correspond to

2 and 5.5 percent tariff rates respectively. The difference between growth rates of export sales

generated by the change in each IC indicator for the two values of foreign market access index are given

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283

in Table 5. The table shows that a country in the 75th percentile of market access index distribution

benefits from one standard deviation improvement of regulatory quality by 10 percentage points more

than a country in the 25th percentile of the distribution. The impacts of the other IC indicators are of

similar magnitudes. This finding shows that improvements in investment climate are important in

reducing the barriers of trade and in leading to the convergence of export performance of countries.

Table 5

Impacts of Improvements in Investment Climate Indicators on Exports (in percentage points)

Indicator Regulations Finance Entry

Time to

Export Infrastructure Property

Total Impact 10.1 9.9 12.4 7.9 10 9.6

Note: Improvements in IC indicators mean increase for regulations, finance, infrastructure, and property indicators where it

means decrease in entry time and time to export.

Overall, this analysis indicates that, after controlling the effects of size, remoteness, and past export

growth performance of countries, restrictions in foreign market access and domestic tariff policies

reduce export performance. Another important result if that improvements in the investment climate

indicators (regulatory quality, trade facilitation, entry regulations, access to finance, infrastructure, and

property rights) not only increase export volumes but also reduce the distortions caused by restrictive

foreign market access.

Export Competitiveness and the Intensive and the Extensive Margins of Trade. Ana Paula

Cusolito (2010). Mimeo. The World Bank.

This note studies the impact of export competitiveness determinants, such as market access,

institutional environment, labor market regulations, and business environment on both the extensive

and intensive margins of international trade. Its main purpose is to identify the constraints that prevent

countries to increase trade along these margins. Variations in the intensive margin capture changes in

the value of already exported and imported goods. By contrast, variations in the extensive margin

account for changes in the number of exported and imported products.

The author uses a version of the standards gravity equation that controls for selection, firm

heterogeneity, remoteness, and endogeneity. The methodology consists of two steps. In the first one, a

probit model is estimated where the dependent variable, Yij, is a dummy that takes value 1 if country i

exports to country j. In the second step, the standard gravity equation is estimated, controlling for

selection, remoteness and firm heterogeneity. Specifically, the model is as follows:

Xij=β1+ β2LPIi+ β3(MKT Accessi)+ β4(ICTi)+ β5(Institutional Indexi)+ β6(Labor mkt inst.i)+ β7(Knowledge

economy indexi) + β8(Av. Tariffsi) + β9(GDPi)+ β10(GDPj)+ β11(Remotenessi)+ β12(Distanceij)+ β13Zij+

β14 (Heterogeneityi)+Ij+µij,

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284

Yij=1[α1+ α2LPI+ α3(MKT Accessi)+ α4(ICTi)+ α5(Institutional Indexi)+ α6(Labor mkt inst.i)+

α7(Knowledge economy indexi) + α8(Av. Tariffsi) + α9(GDPi)+ α10(GDPj)+ α11(Remotenessi)+

α12(Distanceij)+ α13Zij+ α14 Entry Costsi+Ij+vij>0],

where vij˜ N(0,1) and (µij, vij) is independent of X with zero mean.

The variables are as follows:

‐ Xij is the volume of exports from country i to country j

‐LPIi is the logistic performance index of country i

‐MKT Accessi is a variable related to the difficulties to have access to foreign markets

‐ICTi is the information and communications technology index of country i

‐Institutional Indexi is an index related to the quality of institutions in country i

‐ Labor mkt inst.i is an index related to the rigidities in labor regulations

‐ Knowledge economy indexi is an index related to the intensity of the R&D activity in country i

‐ Av. Tariffsi is the mean of the tariffs imposed by country i

‐GDP refers to gross domestic product

‐Remotenessi is a measure of how far is country i for the rest of the world

‐Distanceij refers to the distance between country i and country j

‐Zij is a vector of variables that includes dummies capturing the landlocked condition of country i, the

existence of a common border between country i and j, a common language between country i and j, a

colonial relationship between country I and j, and a common colonizer between country i and j.

‐ Entry Costs is a measure of the number of procedures a country has to complete in order to operate

legally in the markets.

The data is at the Industry level (SITC Rev. 3 3‐digit classification) from WITS. Data on competitiveness

come mainly from the World Bank. The Trade Tariff Restrictiveness Index (TTRI) and the Market Access ‐

Trade Tariff Restrictiveness Index (MA‐TTRI) are used measure trade policy barriers. The author

constructs an index of export competitiveness by applying principal component analysis (PCA) to the

main determinants of export competitiveness: TTRI, MA‐TTRI, LPI, ICT, KEI, II, and LMR. The new

indicator is defined as the predicted value of the first component. Higher values indicate better

performances. Table 6 shows the result of estimating these equations66.

66 To satisfy the exclusion restriction, the author introduces the number of legal procedures needed to start a business (SB) as an explanatory variable in the first step.

APPENDIX

285

Table 6

Impact of export competitiveness determinants on the extensive and intensive margins of trade

The estimated coefficient is positive for the extensive and intensive margins. However, it is statistically

significant at the first one. A one percent change in the export competitiveness index increases the

probability of exporting by 0.018 percent. In order to analyze how different determinants of export

competitiveness affect the intensive and the extensive margins of exports, Columns (II)‐(VIII) report

results using the determinants of competitiveness separately. The last column displays the estimation

outcome when we include all the variables.

The Logistic Performance Index is statistically significant and positive to explain both the probability that

two countries engage in trade and the value of their trade relation. A change of one unit in the index

increases the probability of trade by 0.09 percent. The same variation raises the volume of exports by

33,200 dollars.

The quality of the institutional environment is another important factor that affects trade. A one percent

change in regulatory and rule of law quality increases the probability of trade by 0.0018 percent.

Extensive margin I II III IV V VI VII VIII IX

Competitiveness index 0.0018792

[0.0002393]***

Starting a business 0.004545 0.0044718 0.0048344 0.0092452 0.0029094 0.0051268 0.0022697 0.0997738 0.0009022

[0.0000705]*** [0.0000627]*** [0.0000503]*** [0.0001409]*** [0.0001069]*** [0.000068]*** [0.0000554]*** [0.001161]*** [0.0000305]***

Logistic performance

index 0.0031626 0.0009409

[0.0003799]*** [0.0001568]***

Input costs index ‐0.0007365 ‐0.0002196

[0.0000105]*** [7.93e‐06]***

Institutional index 0.0477447 0.0018187

[0.0007383]*** [0.0001293]***

Labor market

institutions index 0.0170846 0.0048798

[0.0005755]*** [0.0001332]***

Innovation index 0.0022063 0.0008842

[0.0000996]*** [0.0000541]***

Trade restrictions 0.003139 0.0010258

[0.0000615]** [0.0000384]**

Market access ‐0.0934245 ‐0.0008957

[0.0027671]*** [0.0000349]***

Intensive margin I II III IV V VI VII VIII IX

Competitiveness index 671273.8

[786408.4]

Logistic performance

index 19174.39 33200.4

[1811.708]*** [9638.709]***

Input costs index 31259.08 ‐1007.211

[120344.9] [2213.621]

Institutional index 18320.78 ‐12206.62

[1447.257 ]*** [18334]

Labor market

institutions index 2580.366 18302.31

[2640.032] [49116.03]

Innovation index ‐1649529 5869.807

[682173.6]** [8924.48]

Trade restrictions ‐1030.634 4291.595

[180.3156]*** [10346.13]

Market access 3737039 ‐3282.468

[1.29e+07] [9049.59]

Num. of obs. 511567 590253 512682 246361 246361 512682 512682 512682 511567

APPENDIX

286

However, there is no evidence that institutional quality affects the volume of exports.

Innovation has also a positive and significant impact on trade. This is the result that innovation increases

total factor productivity, reduces production costs, and allows firms to cover the fixed cost of exporting.

A change of one unit in the innovation index increases the probability of exporting in 0.088 percent.

However, there is no evidence that innovation affects the intensive margin.

Tariffs and other trade policy barriers to trade limit the access to foreign markets and reduce the

probability that two countries engage in trade. By contrast, expanded policy‐induced export

opportunities can have a positive effect on firm performance, which in turn impact on trade. In the

estimation, a one percent change in the uniform tariff of trading partners increases the probability that

two countries engage in trade by 0.0009 percent.

In sum, the signs of the coefficients for trade logistics, institutions, innovation, and market access are

according to the theory. The signs of the coefficients for starting a business, labor market rigidities, and

tariffs are different from those expected. Unfortunately, the author cannot rationalize these findings.

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